Using Your Home Equity in Retirement

For decades, home ownership has been a cornerstone of the American Dream. It’s about more than just owning a home; it’s about building equity. Homeownership creates wealth, as homeowners build equity by paying off their mortgage or most of it.

A home is one of the few assets you can live in and still have an income stream so it could be an important retirement asset for some people. The value of your house depends on where you live and how much it costs to buy a similar property nearby. The home equity built up in the home can generate retirement income through reverse mortgages or through the sale of the house to purchase a smaller one with lower maintenance costs.

Equity in your home is the market value minus what you owe. If you have a remaining mortgage balance on your home, your equity will be lower than if you were to sell it. If you have an outstanding mortgage, your home’s equity will be lower than if there were no mortgage.

Your equity can be used for other purposes, such as a down payment on another property.

Ways to Use Home Equity for Retirement

  1. Save money by downsizing and investing the remainder.
  2. Consider selling your house and moving somewhere cheaper.
  3. Consider a reverse mortgage.
  4. Use the equity in your home.

Save money by downsizing and investing the remainder.

Alternatively, you could sell your house and purchase a smaller, less expensive home or apartment nearby. If you have extra proceeds from the sale, you could invest them in a way that will increase your income.

Consider selling your house and moving somewhere cheaper.

You might be able to reduce your monthly expenses by moving to a city with a lower cost of living. After selling your home, you could invest the equity you have freed up.

Consider a reverse mortgage.

If Homeowners are age 62 and older can borrow against the equity of their homes with reverse mortgages. You can withdraw all the equity in a lump sum or take small monthly payments for a long time with a reverse mortgage. The home’s sale proceeds are used to repay the loan balance, interest, and other expenses such as property taxes and homeowners’ insurance. Upon moving or dying, the borrower repays the loan.

Reverse mortgages aren’t always suitable for everyone. It is possible that if you take out a reverse mortgage, your home won’t be able to be left to your heirs.

Use the equity in your home.

Homeowners can borrow against their home equity through a Home Equity Line of Credit (HELOC). If you have an existing mortgage on your home, the HELOC lender will allow you to borrow against its value. HELOCs tend to be the easiest way to access your equity. Funds from this arrangement can be used toward certain purchases, such as home repairs or vehicle purchases. Variable interest rates are common with home equity lines of credit, making budgeting for repayment difficult for retirees.

What are the benefits of using home equity for retirement?

To cover essential costs, some retirees borrow against their home equity. Accessing home equity might benefit those needing more funds to maintain their current standard of living.

Retirees may appreciate the tax benefits that come with home equity. In retirement, your home can be your biggest tax-free asset. A certain amount of the proceeds from selling your home won’t be taxed. The IRS limit for single taxpayers is $250,000; the first $500k will not be taxed in a joint tax filing. A home sale could free up funds and reduce taxes for homeowners who have paid their mortgage.

However, using home equity for retirement may not be the best choice for everyone. There’s a possibility that your children won’t inherit the house you live in now. 

Besides, you may want to increase your income in other ways, such as by taking on a side job or starting a business. You might decide not to use home equity in retirement if you have a substantial nest egg or wish to pass your house on to your heirs.