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How to use home equity for retirement
Retirees are homeowners. Of those with more than $100,000 in savings, about 90 percent own a house, according to the LIMRA Secure Retirement Institute. Among those with less savings, a still-substantial majority — 70 percent — are homeowners.
The ability to access home equity can save a retiree from running short of money or being forced to sell stocks, bonds and other investments when the market for these instruments is bad, says Jamie Hopkins, co-director of the retirement income program at the American College of Financial Services.
“That is really going to improve a retiree’s cash flow, especially for people relying on withdrawals from their savings because they don’t have a pension,” Hopkins says.
Try these five ways to get the most from your home equity to supplement your retirement savings.
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Sell your home and downsize
If you don’t need that big family home anymore, retirement is a good time to put the old house up for sale and replace it with one that’s more affordable. Making the right move means you could cut these bills:
- Utilities
- Taxes
- Insurance
- Maintenance
The cash you clear on the deal likely will escape income tax. Uncle Sam lets single homeowners exclude the first $250,000 of profit from capital gain taxes ($500,000 for a married couple filing jointly). That’s a major benefit of homeownership.
Hopkins suggests you consider taking at least some of the windfall and buying an immediate annuity to guarantee yourself income you can’t outlive.
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Rent your spare bedroom
Citing U.S. Census Bureau data, Finder.com estimates that there are 33.6 million spare bedrooms in the United States. At $100 per week in rent — cheap in many areas of the country — an entrepreneurial retiree with unused space could gross $5,200 in annual additional income.
“Whether you are the Golden Girls or the Odd Couple, sharing your home could help reduce costs and improve enjoyment of life,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “I see this as a really nice opportunity.”
With rents so high for regular apartments and even studios, co-living arrangements are becoming more common. Be sure to do your homework before allowing a boarder into your home.
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Borrow against your equity
A traditional home equity line of credit, or HELOC, can pay for remodeling or cover other home-improvement costs in preparation for stopping work and selling the house — or staying put.
“Tapping this kind of credit a year or two before you retire can be a good plan as long as you can pay it back before it becomes burdensome,” Hopkins says. “But if you have to spread the payments out over 15 or 20 years, then you are better off looking at a different financing plan that doesn’t include a risk that you’ll be strapped for a long time.”
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Sale/lease back keeps it all in the family
In this cozy arrangement, parents sell property to an adult child or to a specially designed trust for the long-term benefit of the younger generation and then lease the property back. The parents get:
- Tax-free cash or out from under the mortgage.
- A place to live.
The purchasers get rental income that, for tax purposes, is generally offset by related business expenses.
“It’s a great option in the right situation. It isn’t going to be the solution for everyone, but when the parents want to leave the home as a legacy but are a little tight on income a sale-lease back is good way to go,” Hopkins says.
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Best option could be a reverse mortgage
Reverse mortgage lines of credit are available to borrowers 62 and older who have equity in their homes. They can draw on the equity when they need it, and no payback is required until they die or move away. For these reasons, the house can be a great resource when retirement savings runs low.
“The line of credit grows over time. It doesn’t have any required monthly principal and interest payments, and it doesn’t have a predefined maturity date,” says Joseph Demarkey, strategic business development leader at Reverse Mortgage Funding, a national reverse mortgage lender.
Far more people qualify for a reverse mortgage than for a loan to buy a home, he says, because borrowers don’t have to be able to afford principal and interest payments. “We only underwrite for taxes and insurance.”
The American College’s Hopkins, who is also an attorney, says, “Reverse mortgages used to have a bad reputation, but the government has shut lenders’ ability to sell reverse mortgages to people who can’t afford them. Used strategically, it can be a very good tool.”
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