Your House is Your Home
And Usually Your Largest Expense & Store of Wealth
Your house is your home, where you raised a family, developed friendships, and built community. It’s where you feel most comfortable and spend the most time.
Housing is also likely your largest expense.
The equity in your home – the value of your house less any remaining mortgage – is also likely your largest store of wealth.
Your House Has Many Uses
A Home, a Reserve, a Bequest, or a Source of Income
A house lets you live in your home rent-free, with no landlord who could raise your rent or ask you to move. Home equity lets you to live in your home – the portion you own free and clear – with no mortgage payments.
Retirees today also use their house in two other ways.
It’s a reserve – primarily for health-related expenses, especially long-term care in a nursing home, the most significant medical expense retirees often face.
It’s a bequest – with home equity not used as a reserve left to children or charity.
It could also be used for a different purpose – it can also be used for income. The main ways to do that are to downsize or to take out a reverse mortgage.
How Downsizing Can Increase Your Income
It Can Add to Savings & Cut Your Expenses
It Can Add to the Income You Draw From Savings. Moving is expensive. It often costs 10% (or more!) of the price of your house. But once the price difference covers the cost, downsizing adds to your savings and the income you can draw from savings. And what it adds is typically tax-free.
It Can Cut Your Expenses & the Income You Need. Taxes, insurance, upkeep, and utilities often run over 3% of the value of your house. If downsizing cuts these costs, it cuts the income you need.
To see what downsizing could do for you, CLICK HERE to use our calculator:
Downsizing could mean moving to a more suitable house, one with
- The right number of rooms & a layout you could live in as you age.
- In a neighborhood that offers
- Things you enjoy – whether it’s nature, family, or coffee shops.
- Easy access to things you need – shopping, entertainment, and medical care care – so you’ll walk more (which is good for you) and you might even give up a car (cutting expenses).
How a Reverse Mortgage Increases Income
A Quick Primer
A reverse mortgage lets homeowners, age 62 and over, tap their home equity and stay in their house.
A Reverse Mortgage is a mortgage – a loan with your house as collateral.
- Because the money you get is a loan, it’s tax-free.
- The loan needs to be repaid only when you move, sell your house, or die. You can stay in your house for the rest of your life without making any payments.
- The value of your home equity (the value of your house less what you owe) will decline over time unless you pay down the loan (which very few do) or the value of your home grows faster than what you owe – what you borrow plus interest.
What You Could Get
- A line of credit that can be used as a reserve or as a source of income.
- A lump sum that can be used to pay off the mortgage, that cuts fixed expenses and the income you need.
- Monthly payments for life, that provide an income you can’t outlive (though payments do NOT rise with inflation, and thus will buy less as prices rise.)
A Reverse Mortgage could be right for you
- If you stay in your house for the rest of your life (as you might have little home equity left should you move.)
- If you don’t need the home equity for emergencies or to leave as a bequest.
- If you’ll be able to pay your taxes and insurance (as you could lose your house and have little or no home equity if you can’t.)
You MUST meet with a government-approved counselor to apply. Make sure you benefit from the meeting. Make sure you understand:
- The costs, benefits, and financial implications.
- Your alternatives. (If you intend to repay the loan, a conventional home equity line of credit has much lower fees and interest rates.)
- How to avoid scams. It’s easy to lose a lot of money!
For more information, a calculator & contact information for approved housing counselors, CLICK HERE for the Department of Housing and Urban Development website.
It's a Balancing Act
When & If to Use Your House for Income
Consider Downsizing first.
- You want to be in the right home for retirement as soon as you can.
- Moving is more difficult when older, both physically and socially.
Consider a Reverse Mortgage when in the house you’ll live in for the rest of your life.
- If you get a reverse mortgage and draw out much of what you could get, you could have little home equity left should you decide to move, or need to move.
- It could nevertheless make sense to get a reverse mortgage line of credit, even if you might move, so you could use your home equity as a reserve when needed.
What do you need & value?
- Downsizing makes sense if the value of the added income outweighs the decline, if any, in the suitability of the downsized house & the cost and bother of moving.
- Using a Reverse Mortgage for income makes sense if the value of the added income outweighs the value of the home equity you tap as a reserve or bequest down the road.