Homes represent the bulk of even a moderately affluent pre-retiree’s wealth, beyond pension and Social Security income. According to research by the Society of Actuaries, only about 20% of homeowners plan to use their home equity to help finance retirement. Of those who do, few have thought about tapping their home’s value and simply plan to sell it to generate retirement money.
Home-equity loan
Pulling money out of your home is often not advised if the money is needed for basic living expenses. Lenders also need to be sure you’ll be able to repay the loan. One retirement-friendly use of home-equity loan funds is remodeling, to make your home “senior-friendly” so you can continue living there as you get older.
Reverse mortgage
Reverse mortgages allow you to tap the equity in your home and stay there as long as you want, if you can continue paying property taxes, home insurance premiums and maintenance expenses. Reverse mortgage fees have been criticized as too high, but the government recently began supporting a less expensive home-equity-conversion mortgage called the HECM Saver loan (PDF). However, the “price” of smaller fees is that consumers get access to smaller a share of home equity.
Adjustable-rate mortgage (ARM)
A five-year ARM can be had today for less than 3% in some markets. If you know you will be selling your home within five years, getting a five-year ARM can allow you to pay down the principal balance on your loan and keep more of the equity for yourself when you sell the property.
Rent a room
It can be hard to let a stranger into your home. It can be harder still to afford your home on a retirement income. Talk to friends who have done this and learn from their experiences. Insist on personal references and consider paying for a background check before executing a rental agreement.
Rent your entire home
According to tax experts CCH, if you rent your home for fewer than 15 days a year, the money you receive does not need to be reported as gross income on your tax return. Also, if you’re planning to take an extended trip, your home can be safer if it’s occupied by a temporary renter than if you left it vacant. To increase your comfort level, work with established vacation-rental companies.
Downsize housing expenses
For many retirees, the smart housing move is literally that — a move to a smaller home and perhaps even a different state or country that offers sharply lower living costs. Be wary of being trapped in your home by memories or old possessions that can weigh you down emotionally and financially.
Mortgage-interest tax break
Interest payments on your home are still tax-deductible. You can deduct the interest on home-equity loans as well. Interest deductions rarely turn a bad decision into a good one, but they should be included in your evaluation.
Energy tax credits
Some energy tax credits were extended into 2011, and there are continued tax credits for solar and other alternative energy investments in your home.
Nontaxable home-sale gains
Gains on the sale of your current home — up to $500,000 in gains for a couple — are tax-free. You must have lived in the home for two of the past five years, according to tax experts CCH, but there can be exceptions due to health or other emergency factors.
For more information about buying, selling and/or leasing property in the USVI, please contact Jennie Rosenberg at, or 340.690.4903.