The benefit of owning a home over renting is that your home (unless it is in poor condition) is a form of investment. In retirement when you are sorting out your sources of income, your home can ultimately be an asset in terms of equity and leaving a legacy to your beneficiaries. In considering the effect of home ownership on retirement, it’s important to think about when, if and how you will tap into that equity.
Considering you are entering retirement either fully owning your home or being close to it, you generally have four options, each of which has different implications when it comes to tapping into your home’s equity as a source of retirement income.
- Sell your home and downsize. If you are looking to benefit from the effect of home ownership in regard to equity, this is the most straightforward way to do it. Trade in your current home for a smaller, less expensive one. Then, use the money left over to invest elsewhere—preferably an investment that earns enough to cover your new mortgage payments.
- Sell your home and upsize. For whatever reason, some people opt to do the reverse—to sell their current homes and purchase one that is of equal or greater value. It could have to do with their desired retirement location, having space for grandchildren to visit, etc. There are ways to tap into the equity of your home in this scenario, and they are called home equity loans and reverse mortgages (more on that below).
- Sell your home and rent. After dealing with all of the ups and downs of homeownership throughout their working lives, some people are ready to shed the responsibility in retirement. In this situation, you would sell your home, invest the cash you get from the home sale and rent your next living space. Renting eases the financial burden of keeping up with home maintenance and property tax, but be careful—rent can and probably will increase throughout the duration of your retirement.
- Stay in your current home. If your home is paid off, and you are happy living where you are, then you may just want to stay put—especially if you are interested in leaving your home to your beneficiaries. Again, you can tap into your home’s equity in this situation by establishing a home equity loans, or a reverse mortgage.
What is a home equity loan?
A home equity loan (HEL), is a loan for which the borrower uses the equity of his or her home as collateral. It is a loan, so you must repay it as interest, and this repayment starts immediately upon taking out the loan. With their low interest rates, HELs can be beneficial when you need cash to cover a large purchase, such as a home improvement like a new roof. As a longstanding source of income, however, a home equity loan is generally not viable. If you are unable to repay the loan, the consequence is losing your house.
What is a reverse mortgage?
To tap into your home’s equity in retirement, you can also apply for a reverse mortgage. A reverse mortgage is a type of home equity loan designed for people aged 62 or older. It involves the homeowner borrowing money against the property’s equity, but without having to make mortgage payments. The total loan amount is typically fixed, and the borrower can take it as a lump sum or in regular monthly installments. The benefit of a reverse mortgage is that the money does not have to be repaid until you pass away or sell your home, and the amount of repayment is limited to the value of the home at that time. Read more about when you should use a reverse mortgage in retirement.
The effect of home ownership on retirement can be beneficial in terms of using the home’s equity to your advantage. Whatever you decide about your living situation, take time to make sure that it is right to meet your needs and desires for the retirement you have worked hard to earn.
For more retirement advice and insight, continue to follow Ty J. Young Inc.’s Retirement You Earned blog! If you are interested in setting yourself up to receive guaranteed income payments in retirement, contact the Ty J. Young Inc. team today at 877-912-1919!