Your home can be used to give your retirement savings a quick and significant boost. But each of these ways of tapping your home equity also comes with potential pitfalls. Here’s how your home can help you to pay for retirement.
Pay off your mortgage. Owing a home mortgage-free eliminates one of your biggest monthly bills. While you will still have to pay taxes, insurance and maintenance costs, people who pay off their homes by retirement no longer need to make mortgage payments or pay rent. Paying off your home makes it much easier to live on a limited budget.
Downsize. Selling your home and moving into a less expensive house can help you to add a significant amount to your retirement savings and cut your monthly expenses at the same time. For example, if you downsize from a house worth $250,000 to a $150,000 house, you are likely to add about $75,000 to your retirement savings, assuming you pay $25,000 in selling and moving costs, according to calculations by the Center for Retirement Research at Boston College. You’re also likely to cut your taxes, insurance, upkeep and utility bills from $8,125 at the more expensive house to $4,875 after you downsize, CRR found. If you spend 4 percent of the $75,000 each year you will increase your annual retirement income by $3,000 and the smaller maintenance bills give you another $3,250. So, downsizing, in this case, would result in $6,250 in extra income per year.
Relocate. Many workers aim to live near their jobs, and parents often strive to live in good school districts, but retirees no longer need these types of amenities. Now you are free to pick a place to live that offers the entertainment options, medical care and affordable transportation that will help you during your retirement years. You might want to pick a place that has better weather or the scenery of your choice or decide to relocate near family members. If you live in a high-cost city, you can often significantly improve your retirement budget by moving to a place with more modest housing prices.
Tap home equity. A reverse mortgage allows retirees ages 62 and older to use their home equity to pay for retirement needs while remaining in their home for the rest of their lives. The loan only needs to be repaid if you move, sell the home or die. A reverse mortgage can be received as a line of credit, lump sum or monthly payments for life or a set period of time. But reverse mortgages can be expensive. CRR estimates that a reverse mortgage taken out on a house worth $250,000 will result in $8,250 worth of fees, including an origination fee, service fee, mortgage insurance and ordinary mortgage fees. And you can’t leave the home to heirs unless they pay back the loan.
Become a renter. If you sell your home and become a renter you can use your home equity to pad your retirement savings. Renters can call the landlord to take care of emergency repairs and some home maintenance chores, and typically don’t have to worry about cutting the grass or shoveling snow. Becoming a renter might also allow you to live in a more walkable neighborhood near stores and recreational opportunities. The biggest downsides of renting are the possibility of having your rent increased while on a fixed income or being asked to move out.