During the early part of this decade, Americans used their home equity in ways that went largely unexplored by previous generations. As real estate values soared, so did the ability to tap a home’s value to pay for college educations, cars, furniture and even things like vacations and cell phones. No longer was a house primarily a home; rather, many saw their houses as ATMs.
That view, and how a home’s value should play into one’s retirement plans, has changed again with the painful retribution delivered by the housing meltdown.
The recessionary environment has forced those who included their home values in their retirement calculations to re-evaluate their position. Below are two options to help investors whose retirement consists largely of their home’s equity enter their retirement years with peace of mind and increased investment security.
The first logical choice for any investor is to downsize. Downsizing offers the financial benefit of having a lower monthly mortgage payment, resulting in increased cash flow, reduced maintenance costs and lower utility bills. Downsizing could also lower your real estate taxes due to a lower estimation on a smaller home. Also, be sure to evaluate the effect of a new home versus an older one due to a potentially much lower tax base under Proposition 13.
For those investors who have paid off their current homes, one of the largest benefits of downsizing stems from the possibility of purchasing new homes for below their value in the current market and having the ability to wait out the market and sell their current homes when prices are back up.
Homeowners also can consider a reverse mortgage. On a typical mortgage, an investor makes payments to a lender; however, in the case of a reverse mortgage, the lender makes payments to the homeowners. These payments do not have to be paid back while the owners live in the home.
The best aspects of a reverse mortgage are that they are not taxable, do not affect Social Security or Medicare benefits, have no income restrictions and the homeowner retains the title of the home and does not have to make monthly repayments. Before taking on a reverse mortgage, investors should be sure to research specific loan requirements, interest rates and monthly payments versus the amount of cash flow they actually need.
For the majority of investors looking for answers on how to best use their home equity in retirement, the above tips can be a great starting point. Investors must remember that before making any large purchase or loan decisions, they need to do research and consult with a financial expert to decide which options work best for their specific situation.
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