With many Americans facing a shortfall in their retirement savings, the home they own can be a substantial way to catch up. Typically, the longer you’ve owned a house, the more equity you have built up. What’s more, some homeowners are in the enviable position of not having a mortgage when they enter retirement, giving them a lot of ways to get income out of their house. (See: Retirement Savings: How Much Is Enough?)
When it comes to using your home for retirement, people have many choices, but that doesn’t mean they all make sense for you. A reverse mortgage, for instance, may be perfect for one retiree and not appropriate for another. Homeowners have to weigh the pros and cons of any strategy before they make a move. With that in mind, here’s a look at five ways your home can bankroll some or all of your golden years.
Whether you own the home outright or are still paying off the mortgage, a great way to get income out of your house is to sell it and then downsize to a smaller one. Downsizing will mean different things to different people, but either way, a cheaper property will immediately increase your cash flow. Let’s say you sell your home for $500,000 and buy a new one for $250,000. That gives you $250,000 you didn’t have before. Not to mention a smaller mortgage payment if you are taking out a loan. (See also Downsizing a Home: Knowing Whether It’s Worth It.)
Your living costs will make up a big portion of your expenses in retirement, and a big chunk of that will come from the mortgage payment each month. If you start your retirement journey without a mortgage, it will boost your income stream and give you one less thing to worry about.
What’s more, there are benefits if you can pay off your mortgage in, say, 20 years instead of 30. “By paying off your mortgage in a shorter period of time, you are saving the interest paid, which can amount to a sizeable nest egg,” says Carlos Dias Jr., founder and wealth manager of Excel Tax & Wealth Group in Lake Mary, Fla. “For example, a $200,000 mortgage with a 3.5% interest rate amounts to $898 per month, or $323,280 paid in the lifetime of the loan. However, with a 6% interest rate, the same $200,000 mortgage amounts to $1,199 per month, or $431,640, which means your home was paid over two times.”
Retirees who can’t or won’t sell their home but who have extra room can get some income out of their house by renting out a room or a basement apartment. Even renovating the house to make it a two-family home could be worth it if it can be done relatively inexpensively and the payback is quick. There are safety and security risks associated with renting, but if you find the right tenant, it can increase your monthly income and even help pay for some of the utility bills.
Not for everyone, a reverse mortgage is a way retirees can get equity out of their home and have a stream of revenue to live on. Ideal for people who don’t want to leave their home to their heirs, a reverse mortgage gives you back your equity in a lump sum or in installments. Keep in mind that if you can’t pay back the loan, get sick and are out of the house for more than a year, or if your heirs can’t pay back the debt, you could lose your home. (For more, see How Does a Reverse Mortgage Work?)
“Reverse mortgages only make sense if the client will stay in the home for the foreseeable future. If the home doesn't meet the client's needs, it may make sense to rightsize or downsize,” says Marguerita Cheng, CFP®, chief executive officer of Blue Ocean Global Wealth in Rockville, Md.
Homeowners can free up some serious cash if they sell their home and rent. Sure, you aren’t building up equity, but you also don’t have to worry about where the money is going to come from to cover the bills each month. Not to mention that in a rental you usually don’t have to shovel the walk way, mow the lawn or otherwise maintain the property, all of which costs money. If you choose a neighborhood where you can easily get around, you can also get rid of the car and the costs associated with that. (Read our tutorial for more: The Complete Guide to Real Estate Renting.)
In a perfect world, everyone saved enough money to live the retirement of their dreams, but in reality, it is their home that will be the primary source of money during their post-work years. For homeowners, options abound when it comes to using their home as a cash machine. Selling, downsizing, renting, becoming a landlord and engaging in a reverse mortgage are all ways to do it. What make sense for you will depend on your financial situation.