Most of us look forward to retiring someday. If you own a home, it can be an important part of your financial future.
Leverage your home equity
If you purchased a home 20 or 30 years ago, chances are it has appreciated during that time, making it worth more now than it was when you bought it (even adjusting for inflation). And if you’ve been making monthly mortgage payments for years, you probably have a lot of equity built up. As you approach retirement, you can tap into that value with a home equity loan or line of credit. This allows you to pay off other debt, afford medical care, or renovate your home so it is easier to navigate as you age.
If, on the other hand, you are in your 30s and considering purchasing a home similar to the one you are currently renting, I’d say go for it! You’ll have to save the down payment, of course, but once you’re in, your monthly after-tax mortgage payments will likely be similar to your monthly rent. If you were to buy a house at age 35, by your 65th birthday, you’d own the house free and clear. If housing appreciates during the next 30 years as much as it did during the last 30 years, today’s median home price of $485,000 will be valued at $1,880,000. Let’s say, today you buy the home with a 20 percent down payment of $100,000 and you make all of the regular monthly payments. This will result in your $100,000 investment growing to $1,880,000 when you retire. And as an added benefit, when rents have doubled 10 years from now, you’ll still be paying the fixed-rate you agreed to when you bought your house.
Although you’d need to pay taxes and insurance (and home maintenance expenses), you wouldn’t have a mortgage payment, which would reduce your monthly costs right about the time you hit retirement.
Sell the house, use the proceeds
Another way to use your property to your financial advantage as you approach retirement is to sell the house and buy something smaller or less expensive. With current tax laws, individuals are allowed to waive capital gains taxes on the first $250,000 in gains, and couples are allowed to waive the first $500,000.
If you want to stay in the same region, you could save money by purchasing a smaller home, which will also reduce non-mortgage-related monthly expenses like maintenance and utility bills. If you’re open to leaving the area, you may be able to purchase a home of the same size and still reduce your costs. Have you looked at home prices in Texas, Kansas, or Kentucky? Your money goes a lot further there. The median home price in Ukiah is in the upper-$400,000 range. In Kentucky, it is in the mid-$300,000, leaving you with at least $100,000 to put in your pocket and still have no mortgage.
Refinance for some extra cash
If you can afford a monthly mortgage payment, you can refinance your current loan and withdraw cash for whatever you need or want—a vacation in Bahamas, putting your grandchildren through college, buying a motorhome, or paying for your significant other to reside in an assisted-care facility.
And this doesn’t have to be a conventional loan — it could be a reverse mortgage. If you are 62 or older, you can use a reverse mortgage to borrow against the equity in your home. Instead of making mortgage payments, the bank will pay you in one of four ways: 1. A lump sum 2. Monthly payments, 3. A line of credit, or 4. A combination of these—and as long as you continue to live in the house, you do not have to repay the loan. With a reverse mortgage, you continue to hold title to your property. Lenders simply add a lien onto the title to be sure they can recoup expenses once the loan is eventually paid off (usually when the last borrower permanently moves out of the house and the heirs sell the property).
There are many advantages to home ownership as you approach retirement. Think about your needs and work with a financial advisor to plan accordingly.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. To see previous articles, visit www.selzerrealty.com and click on “How’s the Market.”
Dick Selzer is a real estate broker who has been in the business for more than 45 years.
