February 4, 2020

Edited 05/19/20

Home Equity: Ways to Make Money From Your Home

If you’re retired and out of the workforce, you may have not considered a major asset that can be used for retirement income. During your retirement years, you should consider ways to access the equity in your home to assist in providing for your income needs during your retirement years. Learn about what home equity is and what are ways you could be earning even more from it:

What is Home Equity and How Does it Work?

Home equity essentially represents the amount of your home you actually own. It is calculated by subtracting the remaining mortgage balance from the value of the home. Your home equity increases over time as you make payments against your mortgage and/or the value of your property appreciates. Building home equity can allow you to take out a home equity loan, finance improvements, or prepare for unexpected expenses through the use of a Home Equity Line of Credit or HELOC. 

Why is Home Equity Important?

For many Americans, your home is one of your largest financial assets. When creating your retirement paycheck, there are a number of options to consider related to your home. As you think about options such as downsizing or a Home Equity Line of Credit, it’s important to understand how they affect your home equity because it can be an incredible asset to tap into during retirement.

It Is Beneficial For Your Retirement

It can be used for any unexpected and large expenses or emergencies later in retirement such as long-term care costs and medical bills. According to the 2018 Genworth Cost of Care Survey, the national median annual cost for long-term care ranges from approximately $89,000 for a semi-private room to approximately $100,000 for a private room. So, make sure you’re knowledgeable about your home equity and learn about ways you can build it. 

It Also Impacts Your Family

If you want to leave a legacy for your children/loved ones – a home is a good asset to do so. If you have owned your home for a while, it might have a low basis and, although the Federal Government provides some exclusions for primary residences, you might owe taxes if you were to sell. But, if you plan to pass down the home to your kids or anyone else, when they inherit the home, it would get what’s called “a Step-Up in Basis.” This essentially erases any taxable gains.

How You Can Use Home Equity to Fund Your Retirement

Downsizing Your Home

For many nearing retirement, one of the biggest decisions you will make is where to live in retirement.  With Americans over the age of 55 controlling more than 2/3rds of US home equity and the average home equity being greater than $200,000, this decision can be both about lifestyle and a material financial decision. Downsizing can be an attractive way to extract home equity without changing your community.  It’s also an opportunity to simplify home ownership to give you the flexibility to travel and/or spend time with family. Savings can include lower taxes, utilities, insurance and other housing related costs in addition to the biggest benefit: being able to add your current home equity to your retirement nest egg.  

Moving Homes

Relocating to a different city or state can impact both your housing costs and your cost of living. If you’re considering moving, it’s helpful to think about whether this is your forever home, where access to healthcare, your proximity to family, and achieving your desired lifestyle for the early years of retirement (think Sunbelt!) are important. Whether it’s state taxes, property taxes, or insurance, choices on where you live can materially impact your monthly house costs.

Turn Your Extra Rooms Into Rental Income

Today’s sharing economy is offering retirees opportunities to host and be hosted. Airbnb calls the 60+ year olds its ‘fastest growing and most loved demographic,’ growing 45% year-over-year. They are also the most loved hosts on Airbnb and have earned over $700 million in supplemental income through Airbnb in 2017 alone. Airbnb now allows users to offer “experiences” – things like host dinners or give city tours – and is actually the fastest growing segment of their business!

Consider Reverse Mortgages and HELOCs

According to the AARP, about 90% of Americans want to age in place. A reverse mortgage or a Home Equity Line of Credit may be solutions to allow you to access value in your home and enable you to age in place.

What is a Reverse Mortgage?

A reverse mortgage is a loan available to homeowners, 62 years or older, that allows for part of the equity in their homes to be converted into income. In exchange, a bank provides a stream of income, typically for life, and the loan is repaid when the borrower passes away either through selling or by the heirs if they want to keep the house.

What is a Home Equity Line of Credit (HELOC)?

If your income needs are more temporary, you might consider a Home Equity Line of Credit (HELOC). They are intended to be a short-term cash flow tool where, similar to a reverse mortgage, you’re borrowing against the available equity in your home. HELOCs generally have lower fees than reverse mortgages, and unlike a credit card, it charges interest for a loan at a typically lower rate because it is a secured debt. Many people who have a HELOC use that as their emergency fund and use the cash they were holding for emergencies as longer-term investment strategies. The most powerful use of a HELOC is giving the ability to pursue a long-term investment strategy with cash that was otherwise in a savings account. 

Your home is where your heart is, but it is also an asset you can use to fund your retirement. Today’s retirees are hosting on Airbnb, moving closer to sunshine, and hoping to age in place. Factoring these goals into your retirement roadmap will help you live your best retirement.