You might be living in a big pile of cash.
If you're retired or nearly retired, and you want or need more money for your retirement living expenses, the fine place that you call home might help you make ends meet. There are many ways to tap into that home equity, and the Fidelity Research Institute recently compared some of the most common.
They found that, with the exception of selling your home and renting another abode, the benefits to all the strategies were quite similar. Which one you choose may depend on your goals -- whether you want to optimize your cash in hand or the assets you leave to your heirs.
These researchers used a set of assumptions that probably vary from your own particular financial situation, so you'll want to do your own comparisons. But to get an idea about the pros and cons of your various options, take a look at their findings. The researchers compared five different scenarios:
- Sell your home and buy a less expensive one. In this case, the researchers assumed that money left after the new purchase price and costs was invested in an inflation-adjusted lifetime annuity. This generated extra income for consumption and maintained a home that could be passed on to heirs. By preserving the home, however, the retirees must still be responsible for its upkeep and costs, from taxes to maintenance.
- Sell your home and rent a less expensive residence. The benefits of this strategy depend heavily on the amount of your rent and future rent increases. To increase cash flow substantially, the rent must remain low. Retirees would be free of homeowner hassles, but they would not have a home to pass on to heirs.
- Rent your home and live in a less expensive rental. Again, the cost of your new rental may determine whether this maneuver increases the amount of money available for living expenses. However, as a landlord, you can deduct certain home expenses and depreciation on your property. This preserves the home for your heirs, but it turns retirees into landlords -- a job that not everyone may be excited to assume.
- Use a home equity line of credit (HELOC). In this scenario, researchers assumed that our homeowners would borrow 80% of their home's value. This gave the retirees more income in retirement, while also allowing them to stay in their homes and pass the house on to heirs. The home may appreciate enough that the HELOC becomes relatively small by the time heirs inherit the house, though there are no guarantees. The retirees maintain the tax advantages of home ownership. The borrowers would have to make sure they can make payments on their loan debt each month.
- Use a reverse mortgage. This option hasn't been widely used despite its frequent appearance in articles like this one! This option gave our retirees access to cash, without the need for making payments while they remained in the home. The income also doesn't currently count against retirees when it comes to Social Security taxation. But the upfront costs of a reverse mortgage tend to be higher than a HELOC.
Which of these scenarios won the battle? When researchers looked at the present value of the cash freed up in the transaction and the potential inheritance for heirs, they found that all but one looked remarkably similar. The loser turned out to be the option of selling the home and renting less expensive lodgings.
Among the other scenarios, our fabled retirees generally faced a choice -- a trade-off between getting a generous cash flow or leaving a big legacy for heirs. A reverse mortgage tended to create the biggest cash flow. Renting out the family home and moving to a less expensive rented house tended to leave the biggest amount to heirs.
Which one might be right for you? That will depend on a host of factors, starting with your emotional attachment to your home. It may be that moving out simply isn't an option. It may also depend on whether you're simply sick and tired of the burden of homeownership.
You can get more information about the ins and outs of homes at the Home Center. You can also get more information from these other Foolish articles:
- Reverse That Mortgage!
- No Emergency Savings? Try a HELOC
- So You Want to be a Landlord?
- Will You Live Off Your House?