One of the largest investments you’ll make in your lifetime is your home. But did you realize that you can live off the equity when you retire? This can come in especially handy if you didn’t quite save enough for retirement. While you can’t count on your home solely for your retirement income since home values are so volatile, it can be a supplement to your retirement income.
So how do you make your home equity work for you? Check it out below.
Sell Your Investment
First, you should know that the IRS allows quite an exception for capital gains on your home. As long as you lived in the home for at least two of the last five years, you can exclude up to $250,000 in capital gains if you are a single taxpayer and $500,000 if you are married filing jointly. This means you can earn $250,000 or $500,000 in tax-free retirement income.
Of course, you’ll need a place to live even after you have the money in hand, so now what? How do you make the most of your situation?
Sell and Downsize
The most obvious way to live on your home equity is to sell your home and downsize to a smaller home. This offers a few benefits:
- Lower price range leaving you with money to live on
- Lower property taxes
- Lower homeowner’s insurance
- Fewer maintenance costs
Sell and Rent
There’s no rule that says you have to buy a home after you sell your original home. If you’d rather not deal with homeownership, renting is always an option. You’ll likely save money on your monthly payments, as well as reap the following benefits:
- Pay no property taxes
- Only pay for renter’s insurance which is cheaper than homeowner’s insurance
- Not have to worry about maintenance and repairs
- You can live off a larger amount of the capital gains
What to do With Your Home Equity
Now the bigger question is what do you do with your capital gains? Whether you downsize or rent, what you do with the proceeds really determines what happens next. You have a few options:
- Invest the funds and let your proceeds grow to help you have more money in retirement
- Put the money in a high-yield savings account to use during retirement
What you choose depends on where you are in life. If you are still a few years from retirement, why not invest the money in low-risk investments and reap the rewards? If you are closer to retirement, however, you may want to play it safe and avoid losing any of your retirement income.
Other Options to Use Home Equity in Retirement
If selling your home isn’t on your top list of things to do, there are a couple of other ways you can live on your home equity:
- Take out a home equity loan – Find a lender that allows you to withdraw up to 80% – 85% of your home’s equity. If you’re nearing retirement, you should have little to no first mortgage, so there should be plenty of home equity to use. Keep in mind that you’ll have to make payments each month depending on the type of home equity loan you take. A home equity line of credit requires interest only payments for the first 10 years and then full principal and interest payments for the next 20 years. If you take out a home equity loan, you’ll pay principal and interest for 20 years.
- Take out a reverse mortgage – If you and your spouse are over the age of 62, you may be able to borrow the home’s equity in a reverse mortgage. The reverse mortgage doesn’t require you to make any payments while you are alive (and living in the home). You use the equity as income, receiving it either as a lump sum or in monthly installments. The mortgage does accrue interest, but you don’t have to pay the balance back until you or your heirs sell the home.
If you look at your home as an investment, it can be a retirement income vehicle for you as you age. Whether you stay in the home (aging in place) and take out a reverse mortgage or you sell the home, downsize, and live off the proceeds, your home can help supplement any money you’ve saved for retirement thus far.