By the time you reach retirement age, you may have built up a good amount of equity in your home. While selling your house is one way to tap into the cash, it’s not your only option. Retirees can opt to stay in their home, age in place, and use the home as part of a greater retirement planning tool.
“A home is most people’s largest financial asset,” says Larry Pershing, certified financial planner and CEO of Optimum Retirement Planning. “Therefore, it always plays a critical role in your retirement plan, whether you decide to include it in your retirement plan or not.”
For Ron Guay, a certified financial planner with Rivermark Wealth Management, your house also serves as a stabilizing force in your finances.
“The primary role that a client’s home plays in the retirement plan is a hedge against inflation,” he says. “The homeowner has a primarily fixed expense, assuming a 30-year fixed loan, while the renter has an expense that is expected to increase. The owner also has the eventual mortgage liquidation while rent continues indefinitely.”
When it’s time to draw money out of your home, you have a few options.
If you want to stay in your home in retirement, you may want to consider getting a reverse mortgage on the home, says Pershing. “This gives you the option to receive monthly payments for the rest of your life,” he says.
A reverse mortgage is a loan for homeowners typically aged 62 or older that allows you to convert some of your home equity into cash. Unlike a traditional mortgage, no monthly mortgage payments are due as long as you live in your home, maintain it, pay necessary taxes and fees, and meet all conditions of the loan. Typically, when you leave the home, the house is sold, and the proceeds cover the loan balance and the fees.
You can also leverage your home’s equity with a cash-out refinance. In this case, you would refinance your mortgage for an amount more than its current balance and collect the cash difference. This is frequently done when a home has experienced strong appreciation, a substantial amount of equity has built up, or after a remodel that increased its value.
“For most folks, refinancing to ensure you lock in a low long-term rate, and investing any savings in a diversified portfolio remains a very attractive option to help you reach your retirement goals,” says Pershing.
Home Equity Line of Credit
Another type of home equity financing is a home equity line of credit (HELOC). Like a credit card, HELOCs provide access to a revolving balance that can be drawn upon when needed. It’s repaid with monthly payments.
Be careful when using home equity loans or when refinancing. You’ll need to have the funds to make the payments. Otherwise, you put your property at risk of foreclosure if you fail to make the payments.
Pershing says many people look at their home as a last resort for money, but that philosophy may be flawed. Equity can be an effective tool that protects your retirement income when the market has down cycles.
“By withdrawing money [from your retirement investments] during negative years, your account may decrease to a point where there isn’t enough money in it to recover,” he says. “Waiting to use your home equity until you’ve depleted your investment accounts adds to this problem. Instead of tapping your investment accounts during a down year, you can use a portion of your home equity to fund your retirement spending. The investment accounts gain more time to recover, providing more sustainable retirement income over a long retirement.”
The key thing to remember is that you have retirement planning options when considering home equity. It’s a good idea to meet with a financial planner to discuss what options may be suitable for you based on your specific circumstances.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.