Surveys conducted by various financial services providers continue to show a disconnect between retirement reality and U.S. baby boomers. In a recent such survey, use of home equity as retirement income tool came front and center.
However, 37% of those polled reported that they were not on track to pay off their mortgage before they retired.
Assuming that there is some overlap between the “use home equity” group and the “I’ll still have a mortgage” group, there seems to be trouble in river city.
First, let’s consider how one would use home equity to fund retirement.
I see three strategies for doing this, depending on what you mean by “fund.”
First, you can borrow against your home equity via a home equity loan or line of credit.
That is not “funding” in my dictionary. That is simple borrowing. You will accrue interest on a loan that must be paid back. The only relationship between your retirement income and your home equity is that your home equity is serving as collateral and perhaps providing a lower interest rate.
What are the downsides of this home equity loan strategy? There are several.
First, you are creating debt that unsettles your peace of mind, something that most retirees value.
Second, you are paying interest.
Third, you are placing your entire home at risk if you cannot pay the loan back.
I don’t like it. Cross it off the list.
A second strategy for using home equity to fund retirement is a reverse mortgage.
This is also debt, with interest accruing. You don’t have to pay the debt off until you sell the house. But, you may not make it that far.
Reverse mortgages come with high fees. Moreover, you still have to insure and maintain the house and pay taxes.
If you are so cash challenged so as to require a reverse mortgage for income, you could go into default by struggling to pay the other costs of home ownership. If that happens, you lose your house.
I don’t like this either.
The final strategy for using home equity to provide retirement income is to cash out the home equity by selling your home. This is the strategy that works, if you are willing to downsize and pocket the difference between your net sales proceeds and your subsequent purchase price (or rental).
The downsizing strategy provides an extra benefit in that any gain on sale of your house is probably going to be tax free.
This is the strategy we are planning. We have lots of equity in this house. In a year or two, I want to sell this house and buy something for cash that costs no more than half what this house is worth. The surplus sales proceeds will be invested for retirement income.
We all remember 5-10 years ago when so many homeowners were pulling equity out of their homes like at ATM. those days are long gone. I wonder if the mindsets that created this environment have truly changed.
Here is a link to an article that discussed the Ameriprise survey.