"Even for middle-income and moderately affluent Americans in their critical preretirement years (55-64), non-financial assets, principally home equity, may represent as much as 70 percent of total assets exclusive of pensions and Social Security," the report said. Tom Horgan, a Society of Actuaries spokesman and former chief actuary of the Federal Housing Administration, agrees with traditional advice that home equity should only be tapped when necessary, and when it helps achieve a specific retirement objective. In most cases, his best advice for homeowners approaching retirement is to sell their home and downsize into smaller, less-expensive living quarters that also may be closer to shopping and cultural activities. Renting an apartment also eliminates property taxes and most maintenance expenses.
"Retirees are really not looking at home equity as an attractive option for helping to fund their retirement," says another Society of Actuaries spokesman, Steve Siegal. "I think people tend to look at their houses as an anchoring point, and are kind of reluctant to mess with that. There's an emotional attachment there." While echoing Horgan's emphasis on only accessing home equity after very careful thought, Siegal adds that the study found that people were "not exploring any of the options. The point is that people should explore options and find out what's right for them."
There were slightly more than 23 million U.S. households in 2009 headed by someone at least 65 years old, according to federal housing statistics. About 80 percent of these households owned their homes, and of these, 65 percent had no mortgage or other home debt. Even with sharp housing price declines, the median value of homes owned by older people was about $150,000—over $100,000 more than they paid for it.
The best home-finance solutions, experts agree, tend to be the ones that meet an individual's specific needs. The major variables in home equity use include age, health and healthcare expenses, marital and family situation, life expectancy, current and future income streams, family assets, and estate considerations. In short, just about all significant life decisions can come into play in deciding how to deal with your home as a possible retirement asset.
[See the 10 Best Places to Downsize in Retirement.]
There are four major types of decisions that involve your home and your future: borrowing against the value of your home, generating rental income from your home, taking full advantage of government tax breaks, and moving into a residence that cuts monthly housing expenses and is more aligned with reduced retirement income levels:
1. Loans. Home equity loans and mortgage refinancings are rarely advised for paying basic retirement expenses, but they may make sense for special needs or one-time projects. Usually, borrowers need a reliable income stream to satisfy lenders of their ability to repay the loan. In some cases your retirement income would be enough, but you'd need to satisfy lenders that you have enough left over after paying your living expenses to service and repay the loan. Reverse mortgages do not require repayment but usually only make sense for people who plan to stay in their homes for a long time and do not intend to sell them and use the proceeds for other retirement needs. If you have a mortgage and are sure you want to downsize to a smaller home in a few years, consider refinancing your mortgage into a five-year adjustable rate mortgage. You will save a lot of money on mortgage payments and can use those savings to pay down your home loan even further. Just make sure you can sell the home before the five-year reset deadline occurs.
2. Income. Consider renting out a room in your home to generate extra income. This may make special sense if you're still carrying a mortgage on the property. Most retirees bring home less money in retirement than when they worked, which can make carrying a mortgage very difficult. Rental income can help you pay off the mortgage and take a lot of pressure off of your retirement budget. You could even consider renting our your entire home for a visiting vacationer. It could pay for your own vacation, and tax specialist CCH says if you rent out your home fewer than 15 days a year, you don't even have to include the money you receive as gross income on your tax return.
3. Taxes. The mortgage tax break may be reduced or even disappear as Congress wrestles with reforming the tax code and reducing budget deficits. But for now, it's the largest single tax break that individuals receive. Interest on home equity loans is usually deductible. There may also be energy credits and other tax breaks that make sense.
4. Moving. Downsizing can be the smartest way to let your home—or in this case, your new home—pay you money. Reduced living expenses, smaller utility bills, and even lower commuting costs should be on your mind as you consider how you will balance the household budget during your retirement years. Moving closer to key shopping and cultural activities can not only save you money, but also make increasing sense as you age and your time behind the wheel of a car grows shorter. Think carefully about whether you want to rent or buy your new home. And don't forget that gains on the sale of your current home—up to $500,000 in gains for a couple—are tax-free.