Are you like many retirees or soon-to-be-retirees, that find you have substantial equity in your home, either because you’ve paid off or are close to paying off your home mortgage? But you’re not sure you have enough savings to enjoy the retirement you want? You could consider unlocking the value of your home either by downsizing, getting a home equity line of credit or obtaining a reverse mortgage. Let’s consider some of the advantages and disadvantages of at least two of these options.
If you aren’t wedded to the idea of staying in your home for as long as possible the financial advantages to downsizing can be substantial:
- Downsizing frees up assets that can reduce ongoing home maintenance expenses.
- Moving into a smaller, more energy efficient home or to a town with lower property taxes provide big savings.
- With kids all grown up and no longer living at home the time may be right to save by moving to a community with lower public school taxes.
- Selling a home can be very expensive with moving costs, brokers fees and having to make updates before listing the home for sale.
- Though not common, selling your home could trigger capital gains taxes. You can check the IRS Publication 523, Selling Your Home, for details.
- Moving might mean you would be farther away from friends who don’t plan to move.
- If you or your spouse require an extended nursing home stay Medicaid won’t start paying the bills until you’ve exhausted nearly all of your assets, so if you’ve downsized and banked the profits, those profits would be at risk. In most cases, your primary residence can be excluded from Medicaid eligibility calculations. For more details about limits and restrictions that can complicate Medicaid’s primary residence exclusion visit LongTermCare.gov and select the “Medicare, Medicaid & More” link.
- If you downsize and decide to rent rather than purchase a new home, you may be at the mercy of rapidly rising rents in the future.
Reverse Mortgage Advantages
- At age 62 and older, if you own your home or are close to paying it off, you may qualify for a reverse mortgage. This type of loan allows you to borrow against the equity in the home with no loan payments required required as long as you live in the home.
- The value of the home and your age determines the amount you can borrow.
- The money can be received as a lump sum, a line of credit or as monthly payments.
- Reforms in in the laws around reverse mortgages allow a younger (under age 62) spouse to remain in the home if the older spouse should dies or moves into a care facility.
- Proceeds from a reverse mortgage are not subject to income or capital gains taxes and typically won’t impact Social Security or Medicare benefits.
Reverse Mortgage Disdvantages
- Reverse mortgages are expensive with steep up-front costs.
- They have earned a bad reputation as a result of misleading advertising and confusing contracts.
- Reverse mortgages are repaid through the sale of the property after the borrower’s death and heirs cannot inherit the home and there could be little or no equity left in the home as a bequest.
- As your friends begin to retire to other areas or if your mobility or health decline, you may regret the inflexibility of staying in the same house until you die.
Be sure to consider speaking with a trusted financial planner before making major financial decisions, and especially before signing reverse mortgage documents.