Home ownership has often been considered the cornerstone of the American dream; however it might be time to view your home in a new light. Experts are now urging homeowners to see their house as an asset. Letting go of the idea of wanting to pay off your mortgage may be a difficult transition for some. However, using your house to supplement your retirement income may be a good option for those that haven’t saved enough. According to the Center for Retirement Research at Boston College, the latest study in 2013 found that “a typical working household approaching retirement with a 401(k) had only $111,000 in combined 401(k) and IRA balances…that’s enough to yield an income of about $400 a month.” Even if you combine that with social security, it still doesn’t leave retirees with much in the way of disposable income.1
Below are four ways that your home may be able to help you in retirement:
1) Borrowing against your house
If you’re currently working and have enough equity built up, a mortgage or home equity line of credit can be a low interest form of debt.1
2) Renting or sharing your home
Renting out a room is one way to earn some extra cash for retirement. You could also consider sharing your house with friends or family to help reduce expenses.1
3) Downsizing
Selling your house and using the proceeds to purchase a smaller, less costly residence is another way to use the equity in your home. You can use any extra proceeds from the sale to pay off debt or save the funds for a rainy day.1
4) Reverse mortgage loans
In their book, “Falling Short: The Coming Retirement Crisis and What to Do About It,” authors Charles D. Ellis, an investment consultant, and Alicia H. Munnell and Andrew D. Eschtruth of the Center for Retirement Research at Boston College, suggest reverse mortgages as an option for seniors that don’t have the funds to retire.1
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3 The loan typically becomes due when the borrower moves out of the home as their primary residence or passes away. At that time, the borrower or their heirs can choose to repay the reverse mortgage loan and keep the house, or sell the home to repay the loan.
Reverse mortgage loans can be costly; however a majority of the fees can be financed as part of the loan. It’s important to note that with a reverse mortgage, borrowers are still responsible for paying property taxes and homeowners insurance, just as they would with a conventional mortgage. Borrowers must also maintain the home according to FHA requirements. Failure to meet these obligations can cause the loan to become due and payable. However, new HECM guidelines were put into place earlier this year to help reduce the potential for loan default.
If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, call 800-218-1415.
1 4 Ways to Tap Your Home for Money in Retirement – CNBC.com, by Elizabeth MacBride, 9/16/15, http://www.cnbc.com/2015/09/15/4-ways-to-tap-your-home-for-money-in-retirement.html.
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz