Home Equity - Your Retirement Income Key?

Are you ten to fifteen years away from retirement? If so, you probably have two things: A fair amount of debt from raising a family and a reasonable amount of equity in your home.

That debt could be an issue when you retire. When you have to devote a significant portion of your retirement income to paying debts, you'll have much less to support the retirement lifestyle of your dreams. That's why reducing or eliminating debt is an important step in preparing for retirement. Yet, when you look at your current income and 'outgo', you may be a bit perplexed about where that extra debt-reduction money will come from. Think: 'home equity'.

Home equity is the difference between the market value of your home and the balance of your home mortgage debt. Over time, you can build a good amount of equity because your home's value usually increases while your mortgage balance reduces. Here's how you can use home equity money to get out from under debt:

Downsize Your family is gone and your current home now seems 'too big' so replace it with a smaller one at a lower price and use the difference to pay down debt.

Restructure your mortgage By renewing your mortgage for a short term at a larger amount than you currently owe which is usually easy to do because of the appreciating value of your home - you can create extra cash to pay down other more expensive debt. Mortgage interest rates are generally lower than consumer borrowing rates and by keeping the term of your new mortgage short, you can pay it off before you retire.

Debt consolidation simply means paying off a number of higher interest rate loans or other high-cost debt (like credit cards with annual interest rates often in the 19 -28% range) by taking out a single loan at a lower interest rate for a consolidated overall lower monthly payment. You can work out a repayment plan that can allow you to move from simply servicing your debt balances to actually eliminating them and by paying less interest monthly, you'll create additional cash flow that can be used towards your retirement or other financial goals.

Will your home equity be the key to a more comfortable retirement? Be sure about that and every other aspect of your financial life by talking it over with a financial professional.