Your Home as a Source of Income in Retirement

If you're concerned that you may not be able to live comfortably on your retirement income, or if you'd simply like to improve your retirement lifestyle, you might want to take a fresh look at your home. In addition to being a valuable asset, your home may be a source of extra cash. However, since your home probably has more significance for you than mere bricks and mortar, how you access that cash depends on whether you want to stay put or if you're willing to move. Keeping this in mind, let's examine your options.

Selling your home
One good way to free up a large amount of cash is to sell your home. How much you'll realize hinges on the amount of equity you have and where you'll live when the "sold" sign appears in front of your house. You could rent, live with your children, buy a smaller home or a condominium, or move into a retirement community. Before you decide if selling is best for you, consider these questions:

• How will the move impact your lifestyle? You may like the idea of sharing your grandchildren's lives if you move in with your kids, or relish the ease of retirement home living. But you may have to balance those benefits against possible restrictions on your independence. Keep in mind, too, that selling might mean moving away from a community where you've lived for many years. Are you ready to start over?
• Have you considered the costs involved? Selling your home involves brokerage commissions, legal fees, closing costs, and moving expenses.
• Will the sale have negative tax consequences? If you sell your home at a profit and aren't eligible to exclude all of the gain, you may have to pay federal income taxes.
• Will your living expenses go down? Downsizing, for instance, may result in an increase in property taxes if you're moving to a more expensive location. And you'll still have to pay maintenance and utility bills.

Taking out a reverse mortgage
If you don't want to sell your home, a reverse mortgage can offer you the opportunity to convert your home equity into cash. In return for a portion (or all) of your home equity, a lender makes payments to you that you can use to supplement your retirement income. The mortgage typically becomes due only when you no longer live in the home.

The amount you receive from a reverse mortgage depends on four factors:

• Your age (all parties to the deed must be at least 62 years old)
• The amount of equity in your home
• The interest rate charged by the lender
• Closing costs

There are several types of reverse mortgages, the most popular being the Home Equity Conversion Mortgage (HECM). Reverse mortgage funds can be paid to you in several different ways, including a lump sum, a line of credit, monthly payments for your lifetime, monthly payments for a specific period of time, or a combination of the above.

Although reverse mortgages have many benefits, they can also be complex and expensive. In fact, you're required to receive counseling as part of the application process. Here are some other concerns:

• Closing costs and servicing fees are typically higher than for conventional mortgages.
• There's no reduction in homeowner costs. You'll still need to keep the house well maintained and in good repair, and pay all real estate taxes, homeowners insurance, and utility bills.
• You may not be able to pass along your house to your heirs, unless the reverse mortgage (when due) can be paid off with other assets.

Either way, whether you stay or move, your home can provide you with an extra source of cash that will give you more choices as you go into retirement.