Many people over 55 have lived in their homes for 20+ years providing a nice little nest egg. Only problem is, that nest egg is wrapped up in their living arrangements and difficult to tap into when income is reduced during years of retirement. What are options for this growing generation?
1. Reverse Mortgage - A reverse mortgage is a loan that allows homeowners 62 and older to borrow against the equity in their home. Equity is the amount of money you could get for your home if you sold it, minus what you owe on your mortgage. The lender makes tax-free payments to the homeowner, who can use the money as a line of credit, lump sum, or income. The borrower doesn't need to repay the mortgage until they die or leave the home.
There are several reasons a person may get a reverse mortgage, including:
- Eliminating their monthly mortgage payment, while still paying property taxes, insurance and home maintenance
- Consolidating their debts
- Making home improvements
- Supplementing their income
- Increasing their savings
- Paying for in-home care
While these types of loans can be helpful financial tools in retirement, they also come with drawbacks. Here’s a few to seriously consider:
- These loans often come with higher costs, including counseling fees and greater closing costs.
- If you don’t continue to pay your property taxes and homeowners insurance and maintain the home, you could lose your home.
- The loan could impact your ability to qualify for such government programs as Medicaid or Supplemental Security Income (SSI). You should talk to a financial advisor if you receive these benefits.
- These loans are complicated and come with risks. It’s important to understand them fully.
- Because these are complicated loans, they are often used in financial scams that prey on seniors.
I personally don't like this option. My very own grandparents did this 25 years ago not expecting to live as long as they did. Well, that reverse mortgage hung over their heads and when they could no longer physically remain in their home we were forced to sell the home to pay for their care.
2. Refinance Your Current Mortgage - if you were one of the few who did not capture the below 5% rates this could be an option in the next year, but clearly not a good idea right now with interest rates in the 7's.
3. Take Out A Home Equity Line Of Credit (HELOC) or Equity Line of Credit - These types of loans can be helpful if you want to consolidate your debts, make improvements to the home or need a large sum of cash for another expense.
Caution - It’s important to remember that the money you borrow is a loan against your home’s equity and it must be paid back at the end of the draw period. If you can’t make payments on the loan when the time comes, you could lose your home.
4. Rent Out A Room
You could choose to rent a room by the week, month, etc. The time frame and space available to the renter is completely up to you. I have heard of many people renting specifically to those in the medical field who travel often monthly for work. These people tend to not be home much as they are on assignment for a given term.
If you have a long-term renter, you could also cut living expenses by splitting utility bills for things like electricity, heat, cable and internet or including the costs in the rent.
If you have the space you could add an Accessory Dwelling Unit (attached or detached) to your home to increase the rental appeal and the rental income for you. Plus you would have more privacy. We know a few good contractors if you are looking to explore this option. Read our ADU blog for more information.
5. Sell and Downsize Your Home
Did you know that if you are over 55 years old and you choose to sell your home to "cash out" your equity or to downsize you can bring the tax rate of your current home with you anywhere in the State of California? That is a potentially huge tax savings! This works on any property that is equal or lesser to the value of the property you are selling. Anything above that value will be taxed at the current tax rate.
This is an amazing tax advantage. What are some of the reasons you might want to take advantage of this?
- Move closer to family or friends.
- Downsize to reduce the stress of maintaining a large property and grounds that require a great deal of upkeep.
- Move into something that is remodeled and move-in ready rather than updating the home you are in which could be cost prohibitive.
- Move into a single level and get rid of potentially hazardous stairs.
- Increase quality of life by using the equity in your current home to reduce debt and provide financial flexibility.
What is Proposition 19? Proposition 19 allows homeowners who are 55 and older, people with severe disabilities, wildfire or natural disaster victims to transfer their current property tax base to a replacement home anywhere in California.
Anytime you make a big change like this you should consult a tax professional as there will likely be capital gains to consider. In California, there are some gains exclusions for single and married individuals. Also, if one spouse has recently passed away the value of the home will adjust and it will reduce your gains completely.
Please don't hesitate to reach out if you have any questions or would like to discuss your personal real estate needs.