Your personal residence is one of your largest, if not the largest, asset you will own in your life. It’s a great feeling when you make that final mortgage payment! Should you wish to sell your home and downsize after you retire, the revenue code can be very generous. If you owned and lived in your home two of five years prior to the sale, up to $250,000 of the profit may be tax-free or up to $500,000 for if you are married filing joint.
If you want to retain your primary residence, there will be a large asset that you might want to utilize to supplement your retirement income. There are two primary options to think about:
The Home Equity Line of Credit (HELOC) allows the homeowner to use the equity as collateral for a loan. Once approved, you may borrow up to your limit as needed, and the interest charged is tax-deductible. This can be a major source of funds for college, medical expenses and home improvements.
Some form of regular repayment is required on home equity lines, possibly interest only, and full principal is due at the end of the loan period. Homeowners can generate too much debt if this line of credit is not used prudently. I have used an HELOC for many years and the good folks at Newton Federal Bank have been very helpful.
A reverse mortgage can prove to be an attractive supplement to your retirement income planning. The official name is Home Equity Conversion Mortgage or HECM. With these mortgages, a homeowner, 62 or older, may convert their home equity into an additional source of retirement income with selling the home. Reverse mortgages are primarily offered by private companies and are backed by the federal government. Reverse mortgages will be most attractive to homeowners who want to remain in their home for the rest of their lives and retain financial independence.
Reverse mortgages tend to be complex with higher start-up fees. Also, approved loan amounts may be lower than anticipated due to the calculations required during the application process.
There is no denying the positives with this financial product. Eliminating your monthly mortgage payment, if any, along with tax-free proceeds and a variety of choices on how to receive money are real positives. A great safeguard is that the homeowner can never owe more than what the home will sell for. Both the FHA and Fannie Mae guarantee reverse mortgages.
Consider yourself fortunate if you can get through a day without catching a reverse mortgage ad on television. Some of these ads may give the impression that you have no financial obligations, but keeping your home in good shape, maintaining insurance and paying property taxes are still required.
An interesting use of reverse mortgage proceeds is to utilize these funds when the market is in decline to avoid liquidating securities at a loss. With proper planning you should be able to extend your nest egg several years. Actually investing reverse mortgage proceeds should be done with caution, so it’s probably not a good idea to tap your home equity to buy penny stocks.
A fee-only money manager can be a great help to you in managing the equity in your home.