5 Ways to Use Home Equity as a Source for Retirement Income

Episode 308 – For many, many people, their home is their biggest asset. Can you use your home to fund a portion of your retirement? It’s not ideal, but here are five ideas you can try if you need to.

More SML Planning Minute Podcast Episodes





Transcript of Podcast Episode 308

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, five ways to use home equity as a source for retirement income.

It’s been said over and over again that for many people, their home is their biggest asset. If that’s true for you, can you use your home to fund a portion of your retirement? It may not be the best choice, but your home can help.

Here are five ways to potentially use your home as a source of retirement funds if needed. None of these are easy. Your home may be your biggest asset, but it’s probably also your least liquid.

Keep in mind that there is no perfect answer. Each one of these has its downsides. In fact, none of these options are ideal. The ideal solution is simply to save enough money well in advance through some other means. But what if it’s too late for that? Here are some interesting choices:

 

 1. Home Equity Line of Credit.

Also known as a HELOC, a Home Equity Line of Credit is an easy way to access the equity in your home. It is a line of credit where you can borrow money—up to a designated maximum—against your home. Of course, the HELOC must be repaid. Depending on how big your mortgage is, the interest on your home equity loan could be deductible. But keep in mind that interest rates ain’t what they used to be. According to Bankrate, as of October 2024, the average HELOC interest rate is 8.36 percent.[1] Nevertheless, the HELOC can help provide access to a source of funds.

2. Mortgage Refinance.

This could make sense depending on interest rates, including the rate on your current mortgage. If the value of your home has gone up since you’ve owned it, there’s a good chance that you can access some of your home equity. In other words, it may be possible to pull out some cash against your home equity and use it for some other purpose, like retirement. It can also be a good alternative to selling your home, particularly if the market drops.

3. Reverse Mortgage.

While sometimes difficult to understand, a reverse mortgage essentially converts your home equity into a monthly payment while you’re still living there. It is a way of selling your home equity to the bank one month at a time.

The majority of reverse mortgages don’t get repaid until the borrower leaves the house. Instead, the loan typically gets paid back when the borrower sells the home or dies. In these cases, whoever sells the home, likely either the initial borrower or the borrower’s estate, will get the remaining proceeds.[2]

There are federal regulations when it comes to reverse mortgages. Most reverse mortgages are issued through a set of government-insured programs that have their own rules and qualification standards.

4. Downsizing.

The temptation to move into a smaller home often occurs when the last child moves out. People tend to feel that they just don’t need all that room anymore and you can save money on utilities, maintenance and upkeep. There is also a tax incentive that can help.

When you sell, the first $250,000 in profit, or $500,000 for married couples, is free of capital gains tax. If your gain is less than that, you won’t have to pay any capital gains tax at all. But there are some rules you must follow. Among them, the home must be your primary residence for at least two of the five years. Also, you can only use the exclusion once every two years.[3]

5. Sell Your Home and Become a Tenant Somewhere Else.

Home prices are way higher than they were a few years ago. And you may be able to take advantage by selling your home and moving into a cheaper rental. This can be an attractive option for someone who’s tired of dealing with (and paying for) all the yard work and maintenance. As many people in the Southeast can attest to, if you’re not the owner, you don’t have to worry as much about things like storm damage.

Despite all these additional options, the best way to prepare for retirement is still the old-fashioned way: Save the money as you go. You’ll have less to worry about later.

[1] Ostrowski, Jeff. “Current home equity interest rates.” Bankrate.com. https://www.bankrate.com/home-equity/current-interest-rates/?zipCode=10025 (accessed October 11, 2024)

[2] Treece, Dock David. “Reverse Mortgages: How They Work And Who They’re Good For.” Forbes.com. https://www.forbes.com/advisor/mortgages/reverse-mortgages/ (accessed October 10, 2024)

[3] Taylor, Kelley R. “Capital Gains Tax Exclusion for Homeowners: What to Know.” Kiplinger.com. https://www.kiplinger.com/taxes/capital-gains-home-sale-exclusion (accessed October 11, 2024)

More SML Planning Minute Podcast Episodes

This podcast is brought to you by Security Mutual Life Insurance Company of New York, The Company That Cares^®.  The content provided is intended for educational and informational purposes only.  Information is provided in good faith.  However, the company makes no representation or warranty of any kind regarding the accuracy, reliability, or completeness of the information. 

The information presented is designed to provide general information regarding the subject matter covered.  It is not to serve at legal, tax or other financial advice related to individual situations, because each person’s legal, tax and financial situation is different. Specific advice needs to be tailored to your situation. Therefore, please consult with your own attorney, tax professional and/or other advisors regarding your specific situation

To help reach your goals, you need a skilled professional by your side.  Contact your local Security Mutual life insurance advisor today.  As part of the planning process, he or she will coordinate with your other advisors as needed to help you achieve your financial goals and objectives.  For more information, visit us at SMLNY.com/SMLPodcast.  If you’ve enjoyed this podcast, tell your friends about it.  And be sure to give us a five-star review.  And check us out on LinkedIn, YouTube and X (formally Twitter).  Thanks for listening, and we’ll talk to you next time.

Tax laws are complex and subject to change. The information presented is based on current interpretation of the laws. Neither Security Mutual nor its agents are permitted to provide tax or legal advice.

The applicability of any strategy discussed is dependent upon the particular facts and circumstances.  Results may vary, and products and services discussed may not appropriate for all situations.  Each person’s needs, objectives and financial circumstances are different, and must be reviewed and analyzed independently.  We encourage individuals to seek personalized advice from a qualified Security Mutual life insurance advisor regarding their personal needs, objectives, and financial circumstances.  Insurance products are issued by Security Mutual Life Insurance Company of New York, Binghamton, New York.  Product availability and features may vary by state. 

SubscribeApple PodcastsSpotifyAndroidPandoraBlubrryby EmailTuneInDeezerRSSMore Subscribe Options