Many of today’s baby boomers are looking to capitalize on home equity to
enhance their retirement savings. Popular strategies include downsizing to a
smaller residence, relocating to an area where the cost of living is more
affordable, and taking out a reverse mortgage. Regardless of which strategy you
choose, understand that relying too much on your house to fund your retirement
could work against you when the real estate market cools, as it has in recent
years.
Making a Move
Selling your existing home and relocating to a more affordable residence may
be a reasonable option if you have considerable home equity and the shift won’t
negatively affect your lifestyle. As part of your research, remember to
investigate the overall housing costs within your desired area. Real estate
values typically vary considerably by locale, even within the same state.
Finally, when selling your home, consider that the first $250,000 in capital
gains ($500,000 if you sell jointly with a spouse) is not subject to federal
taxation if you have lived in the house for two years or more.
A Reverse Mortgage: Do Your Homework Before Committing
Tapping home equity doesn’t necessarily require relocating. A reverse
mortgage may be a solution if you have significant home equity and a desire to
stay in your existing home. With a reverse mortgage, you receive a source of
income by borrowing against your home’s equity. Payouts are tax free and may be
taken as a lump sum, a line of credit, or an annuity-like payment schedule.
To qualify, you must be at least 62 years of age. You must own your home
outright, or be able to retire an existing mortgage with the proceeds from the
reverse mortgage. As long as the reverse mortgage is in effect, you are
responsible for maintaining your home, and for paying taxes and insurance. The
loan plus accrued interest is due when you die or sell the house.
However, when evaluating whether a reverse mortgage is right for you, be
aware of a number of caveats. First, be sure to consider the fees, which may be
substantial. Also keep in mind that the amount you owe tends to grow over time,
as interest accrues on amounts that are gradually paid out. Should you live in
a home with a reverse mortgage for a considerable period of time, your heirs
may be left with little or no home equity at the time of your death.
Beware the Sales Pitch
Lastly, be sure to beware the sales pitch. There are a growing number of
firms who are heavily publicizing the advantages of reverse mortgages with
splashy TV commercials and advertisements in magazines targeted to seniors.
Reverse mortgages are not for everyone, and they are not as simple as those
pitches make them sound. They are highly technical transactions and require a
high level of understanding and sophistication. You must conduct appropriate
due diligence prior to trusting anyone with this transaction. Reverse mortgages
are not securities and are not regulated as such. Additionally, you should
never consider using the proceeds from selling your real estate to purchase
securities and should be wary of those who suggest doing so. Marketing
information sometimes can be misleading. Remember, an offer that sounds too
good to be true probably is.
Before making any major decisions regarding your home and your finances, it
is advisable to consult with a real estate professional and your investment
advisor to help determine the best strategies to allow you to pursue your
personal and financial goals during retirement.
Jose Freyre, MBA, CFP® is Founder of
Milwaukee-based Monarch Wealth Management, an independent wealth management and
investment planning firm serving the needs of individuals, families, and
business owners. Mr. Freyre can be reached at 414-935-4900 or via email at
jfreyre@monarchwm.com.
Securities offered through LPL
Financial, Member FINRA/SIPC
This material was prepared for
Jose Freyre’s use.
