Managing Your Home as a Financial Asset
Could generations of traditional homeownership wisdom be wrong? Here’s what you need to know to determine whether your home is an investment that will pay off in retirement – or a liability.
If you’re a homeowner who’s ready to retire, you’ve most likely worked to pay off the home, while dreaming of the day when you could relax and live a mortgage-free life while enjoying the fruits of your labor. However, it is important to think carefully about whether homeownership truly serves retirees’ financial interests.
Signs Your Home Is Your Largest Asset
A home can be one of your biggest assets because of the equity that’s been built up. You’ll be able to pass it on to your heirs, and they get a step-up in cost basis to the current market value. This will significantly reduce capital gains taxes if the home is later sold by your children. With that equity, you can take money out of the house in a home equity line of credit. If you’re 62 or older with a substantial amount of equity in your home, it can be used as collateral for a reverse mortgage.
Signs Your Home Is Your Biggest Liability
A home can be a liability when it’s worth considerably less than what you paid for it, especially if you have a mortgage. The last thing you want when you’re retiring is to be saddled with a debt that has no equity. Your home could also be considered a liability if it falls under the category of an expense that you have to manage, such as a mortgage, homeowner’s insurance, municipal taxes, repair or renovation costs, or homeowner’s association fees.
Stay or Sell?
Take a holistic approach to what you want in your retirement years and determine what importance you place on your living space. The answer to this is at the core of deciding if you need to downsize. If you decide to sell your home and downsize to something less expensive, be sure to save part of the proceeds from the home’s sale. You can use that money to fund traveling, hobbies, the cost of living, or any other project in retirement.
You should also try to be more objective in evaluating your home as an asset or a liability. Retirement-aged homeowners generally choose one of these options:
- Plan to pay off your mortgage before your target retirement date
- Get a reverse mortgage that pays out over a specified time period
- Rent out the home for cashflow or offset a monthly cash flow deficit, if you have a mortgage
- Sell the home in the future
If you decide to stay in your home, there are several ways to monetize home equity in retirement, such as needs-based government programs like property tax abatements or home improvement forgivable grant programs. As alternatives to a reverse mortgage, you could tap into loan products such as a home equity line of credit or a conventional mortgage loan.
If you or a loved one needs assistance with estate planning issues, do not hesitate to contact The Stegall Law Firm for guidance.
