Don't Count on Home Equity to Fund Retirement

Extracting your home's value can be costly and complicated.

home equity fund retirement
Eric Risberg/AP
By David Ning

Many people are counting on the equity they have built in their home to help fund their retirement years. But folks who are living without quite enough saved for retirement should be realistic about what that equity can provide. Here are a few reasons to be cautious about relying on home equity to provide for you financially in retirement:

Your spouse will still need a place to live. Some people assume they can use the proceeds of their house if they ever need to check themselves into a nursing home. But you can't sell your home for long-term care expenses when your significant other still needs a place to stay. Don't assume you will be living by yourself by the time long-term care is needed or that your spouse will need it at the same time. Plus, the equity in your home may not even be enough to cover the cost of a nursing home.

The value of your home equity could change. Estimating how much equity you will have in your home if you ever need the money is just a guess. You might refinance in the future, and extend the date you will be totally debt free. House prices also tend to go up and down without warning. Plus, you'll never know how much it will cost you to extract equity from your home if you ever need the cash.

Commissions and taxes will siphon off a big chunk of the value. The standard arrangement is asking the seller to pay the buy and sell realtors 6 percent of the final selling price.
Then you have to contend with the possible capital gains taxes. Sure, $250,000 (or $500,000 for couples) of the gains can escape tax free, but inflation will make these seemingly large numbers much smaller in a few decades when you actually need to sell. You might also want to put the house on the market well before you actually need the cash. If you wait until the last minute you may have to sell the property at fire-sale prices because you are in a hurry.

Reverse mortgages can be very costly. Reverse mortgages allow you to continue to live in your home for the rest of your life while also getting some money, but you'll get far less than what your house is worth. The fees and interest rates for this type of loan are often rather high. Plus, if your circumstances change and you want or need to move, the loan becomes due. You may find years after taking out a reverse mortgage that you want to move out. If you don't live there for whatever reason, you'll need to start paying back that loan, which can be a huge strain on your budget.

Downsizing will net you less cash than you probably think. Many people hope to downsize and use the left over equity to supplement their nest egg. This is a great strategy because not only will you get some equity, but the cost of upkeep at your smaller place is likely to be permanently reduced as well. But be realistic about how much money you'll gain from this maneuver. There are extra costs every time you move, so factor that into your calculations in addition to the commissions and taxes.

Home equity can certainly be tapped in case of emergencies in retirement, but often works best as a last resort. No matter what, you'll always need a place to live.

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Reverse mortgages are designed as financial assistance for people 62 years or older. The reverse mortgage works by allowing the homeowner access to the equity in their home without the issues of a monthly payment for the available funds.

November 29 2013 at 9:43 AM Report abuse rate up rate down Reply
Alex Rodgers

So what kind of advisors would you suggest that I work with? I currently work with, and granted they do seem to help me quite a bit, I’d still like some more input on who you or any of the other listeners would suggest.

November 23 2013 at 8:09 PM Report abuse rate up rate down Reply
Tom Harrell

Mom and DAD and Grandma and Grandpa retired WELL on their Home Equity and Social Security and the Savings from their well paying JOBS and the stable Economies, that were Jealously Guarded by Politicians too Afraid to Buck the \"GREATEST GENERATON\" !
-----------------------the REST of US are DIFFERENT, I guess.-----------------------We didn\'t Beat the NAZIS and the JAPS and COMMUNISTS. All WE did was get our BUTS shot off in Vietnam and Panama and Grenada and Iraq and Pay for Social Security and Medicare the last 60 YEARS.------------We\'re Not as WORTHY to Deserve the SAME \"BULL DOG\" mentallity when it comes to OUR Future.

October 11 2013 at 11:23 PM Report abuse +1 rate up rate down Reply

Nursing homes are just a slow death march that subject you to others who don't care anyway.

October 11 2013 at 9:00 PM Report abuse +1 rate up rate down Reply

What kind of life is that to subject yourself to a nursing home? No life at all.

October 11 2013 at 8:59 PM Report abuse +1 rate up rate down Reply

Just one more way to diminish individual property rights protected by the Constitution. Collapsing pensions, IRAs, Social Security?, etc. THINK ABOUT THE REALITIES of no money and no place to live.

October 11 2013 at 7:14 PM Report abuse +2 rate up rate down Reply

This article presents things way too negatively. Pensions are a gamble, IRA\'s earn pennies instead of dollars because interest rates are so low, savings accounts aren\'t earning much interest either, social security is always in jeopardy and now this article is taking away any hope that people had for their retirement. Thanks for that.

October 11 2013 at 3:21 PM Report abuse +3 rate up rate down Reply
Brian Smith

No matter what, you'll always need a place to live. -- And there aren't many cardboard boxes under bridges available these days...

October 11 2013 at 3:05 PM Report abuse +1 rate up rate down Reply

For many of us, the last five years of living in a recession have taken a toll on savings and retirement planning. Sometimes the only thing left is the equity in your home. I know many people who were forced to retire earlier than they had planned because they lost their jobs and could not find another job. Everyone's situation is different, however if you are single and need a source of steady income, a reverse mortgage may be your best bet.

October 11 2013 at 1:33 PM Report abuse -2 rate up rate down Reply

Once the idea of buying a house, paying it off, retiring in place was the rule. It was a good method. Unfortunately, now all such stability is gone. People move constantly. Families split because people have a house they can't sell, but Dad gets a job in another state. I'm not really sure long term home ownership will ever be feasible again.... Unfortunately, ownership can be long term, even when you don't want it to be. Your cash is trapped.

October 11 2013 at 9:52 AM Report abuse rate up rate down Reply