Will Your Home Pay You to Retire?
Life sometimes gets in the way of our best intentions. Though you had planned to contribute more to retirement, you got hit with college tuition bills, or a medical emergency, or any number of things. (Hey, maybe you planned on having two children and ended up with eight. It happens!) Your home may be a surprising source of retirement funding. And there are a few ways to tap into it.
Downsize
If you own your home and have paid off your mortgage or have a substantial amount of equity, you could sell it and buy a smaller home, investing the difference in a variety of ways, from a simple certificate of deposit or money market account to something more risky, with the possibility of a bigger return, like a mutual fund. If you choose this option, be aware of any capital gains tax implications and make sure you understand how much risk is involved with investing your money, however, you choose to do it.
Renting
If you love living in your home or want to keep it in the family, but find that you have too much space now that the kids are gone, consider renting out part or all of your home. You could take in a renter to fill one of the rooms and share your space; just make sure you know what you’re getting into. You’ll be seeing your new roommate over coffee in the morning, and you may have to tussle over the remote at night. If you don’t feel like having a roommate would be as much fun as it was in college, and you want to travel, think about renting your home while you take a specific amount of time to travel, with your trip funded by the rent you’re collecting. Bonus: You won’t need to pay a house sitter. Either way, make sure you handle being a landlord like a pro, and know your responsibilities, personal liabilities, and any taxes you need to pay when you have a tenant in your home.
Home Equity
A home equity loan or line of credit (HELOC) can also help fund your retirement, especially if you have a lot of equity in your home. The downside is that if you are unable to repay the loan on time, you could lose your house. Your heirs may also find themselves unable to keep the property when you die unless they can afford to assume the loan. (This, of course, won’t actually be your problem, so it may not be high on your list of worries!) In an ideal situation, you may be able to invest the proceeds of your HELOC at a higher rate of interest than you pay on the loan. For this reason, the rate on your loan is really important, and you’ll get a more favorable rate if you’ve kept your credit score high.
Reverse Mortgage
These loans, only available to homeowners 62 and older, are non-recourse, meaning your lender can only use the property to repay the loan and has no other claim on your estate. The property owner, you, have no personal liability beyond the property itself. One downside for your heirs is that they may not be able to keep your home when you die. This option is a good one for your heirs if you manage to die with no equity or be underwater because no additional funds can come from your estate to pay off the loan. One major difference between a reverse mortgage and a home equity loan is that no payments are required on a reverse mortgage during your lifetime. Your heirs will have six months to deal with the payoff of the loan after your death. A reverse mortgage also must be the primary mortgage on your property, so you will need to pay off the first mortgage if you have one, which will reduce the amount of cash you get from the reverse mortgage. Interest rates tend to be higher on reverse mortgages than they are on HELOCs or conventional mortgages.
So, all those years of paying your mortgage, maybe even over-paying it when you could, may well pay off in retirement. The equity you have in your home is a valuable asset and yours to use.