Four Ways to Use Your Home Equity for Retirement Income
© Shane Flait 2010

If you own a house, you can use its equity to improve your retirement income. This article summarizes 4 ways to generate income from your home’s equity.

If you’re scrambling to increase your savings for retirement income, you can put your home’s equity to work for you. You can:

1.      Buy down to free up equity to apply to your savings

2.      Rent out part of it for income

3.      Use it to buy a 2-family to rent out one unit and live in the other

4.      Reverse mortgage it for income

Buy down to free up equity

With the kids gone, you probably don’t need all the house you have. You can sell it to free up equity you built-up over the years. Of course you’ll still need a place to live, and living in your own house is generally the cheapest way to live if you don’t have a mortgage on it.

Buying down means you’ll sell your house and buy a smaller, substantially less expensive house.  If you sold your home for $300,000, you could search for a condo for –say $125,000.  Be sure to find one with the amenities you want and with expenses that are easily handled.

Doing so would free up $175,000 of equity. You can add that to your savings for more income. Withdrawing at a safe 4% per year would increase your annual retirement income by $7,000.

Rent out part of you home for income

Again, if you don’t need all that house, but want to remain living in it, why not rent out part of it for income. You may want to rehab it so that you have an ‘in-law’ arrangement that includes a separate kitchen and bathroom - and a separate entrance.

The money you spend rehabbing the house would, in large part, increase the house’s value. But you should be able to recover your costs and generate a net positive income from renting it out.

Buy a 2-family, live in one unit and rent out the other

Don’t want to rehab? Sell your home and buy a 2-family. Put most, or all, of your freed-up equity into the 2-family then move into one unit and rent out the other.

Some people are bothered by the concept of renting out their property. Don’t be. Just use an agency to find well-qualified renters for you – or, do it yourself. Most people are decent and pay their rents.

While you own your property, its value will keep increasing over the years – as it always has. With little or no mortgage you should easily be able to maintain it through hard times.

Reverse mortgage your house for income

A reverse mortgage allows people who are 62 or older to borrow against their home equity. But unlike traditional home mortgages, no payment is due on a reverse mortgage until the homeowner moves, sells or dies.

If the home is sold, any equity that remains after the reverse loan is repaid is then distributed to the borrower or the borrower's estate. And the loan repayment amount can't exceed the value of the home.

A reverse mortgages can help a retiree use his home equity for income, to pay bills, and more, while remaining in his home.

Reverse mortgages have many of the same costs as a home purchase loan or refinancing a conventional mortgage. So, you’ll pay an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain other standard closing costs. Usually, these costs are capped and can be financed as part of the reverse mortgage loan. The table gives an estimate of such costs.

A reverse mortgage seems ideal for an older person who needs income but wants to stay in his or her home. But unless housing prices are growing fast each year, your reverse mortgage loan will most likely eat up all equity in your home and leave nothing to your children.

 Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com