Especially for those approaching retirement who are in the Baby Boom generation, home ownership and its benefits have been thoroughly imprinted into the financial consciousness. In fact, many in this age cohort may be nearing the point when the home they’ve lived in for decades is about to be paid off.
On the other hand, for many retirees, the day of a completely debt-free home is in the distant future, if it’s attainable at all. According to a national survey reported by AARP, approximately 44 percent of Americans ages 60–70 are still making mortgage payments upon retirement, and 17 percent say they don’t expect their home to be paid off at all.
But even if your home isn’t paid off by the time you retire, it is still one of the most valuable assets you possess, and it’s worth giving careful consideration to how the value in your home can help you as you plan your retirement lifestyle. Along with retirement accounts like your IRA, 401K, and others, you may be able to utilize the equity in your home to improve your financial situation in retirement. Nationwide, homeowners age 62 and above have over $6.5 trillion in home equity; the Federal Reserve Bank of Philadelphia indicates that home equity accounts for somewhere between a quarter to half of the median retiree’s net worth. Here are some ideas for how the value of your home can be tapped to support your retirement.
1. Downsize and Re-Invest Excess Equity
The majority of retirees indicate that they would rather remain in their homes, but many still find it advantageous to free up some portion of their equity in a property that has appreciated over the years. Because the first $250,000 of capital gain from the sale of a primary residence is not taxable ($500,000 for married couples filing jointly), some opt to sell their home—typically a larger place than they need, now that the kids have all moved out—and downsize to a smaller space that requires less maintenance and upkeep. The unused equity from the sale of the larger home can then be invested to provide ongoing income in retirement.
2. Leverage Your Equity
It’s not unusual for retirees to have 80% equity or more in their homes. For those in this position, a home equity loan (“second mortgage”) typically offers the lowest interest rate, second only to the rate on the primary mortgage, in most cases. Because many retirees who choose to stay in their homes eventually require modifications for greater safety and better mobility, a home equity loan or a home equity line of credit (HELOC) may be a more thrifty way to pay for needed improvements that could also add to the underlying value of the property. Interest rates on home equity loans are typically fixed for the term of the loan, usually 10 years. HELOCs, on the other hand, often have a variable rate that can change based on movements in interest rates. In the current rising interest rate environment, it’s especially important to carefully consider all costs and fees before signing up for either a home equity loan or a HELOC.
3. Take a Renter
Retirees with enough extra space and the right layout sometimes rent out a room or even a suite of rooms in order to make a little extra monthly cash. The renter could even be a family member or close friend who needs a place to stay. Just make sure that you report the rental income on your tax return. And, if you spend money on upkeep for the rental space, be sure to hang onto your receipts, so you can deduct the cost against the income when you file your taxes.
4. Reverse Mortgage
Reverse mortgages sometimes come in for bad press, but for the right person, a reverse mortgage can provide a handy source of extra income. A number of reverse mortgage programs now come with guarantees from the Federal Housing Administration (FHA), though you must be at least 62 to apply (for couples, the youngest person must be 62 or older). As you can probably guess from the name, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner in the form of a loan. Homeowners with a reverse mortgage are not required to repay the loan during the time they live in the house. Nevertheless, you should remember that a reverse mortgage is still a loan, and with each payment made to the homeowner, the homeowner’s equity in the home decreases. If you are considering a reverse mortgage, it is important to talk to a qualified financial advisor, and you should carefully review all fees and other requirements of the loan.
Mathis Wealth Management, a fiduciary financial advisor and wealth manager, specializes in helping clients who are in or nearing retirement make smart, tax-efficient plans for funding their desired retirement lifestyle. To learn more, read our recent article, “Retirement and Recession: You Can Have Both.”
* This is meant for educational purposes only. Information presented should not be considered specific advice or a recommendation to take a particular course of action. Neither Mathis Wealth Management nor United Planners and its representatives offer tax advice, HELOCs, or reverse mortgage products or services.