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When I first got my Certified Financial Planner’s^® designation, there was a bit of controversy about how to consider the equity in our homes!

I have read several opinions about the value of home equity, including

• Its value was in the ability to “right-size” your home so you could buy a smaller house outright and have no mortgage in retirement.
• The value of home equity enhances your ability to get a reverse mortgage.
• There was no value in a home’s equity, at all, especially if you were planning to live there for the rest of your life.

One thing is sure – regardless of how much equity you have in your home unless you do something: you can’t eat it.  Our home equity doesn’t necessarily serve our retirement.

One description I have read of home equity is “dead weight.” The growing value of a home does nothing but add to the tax burden provided you live where the state government taxes real estate values: the more valuable your home, the greater the equity, the greater the tax due.  Your equity serves little value beyond your ability to use it in the future.

Today we own a rental home whose value has grown over 30% in a few short years. If we keep the house and continue to rent it, the equity has no value at all. It is nice to see the mortgage drop, and the equity increase but outside of selling the home, or borrowing against it, increasing our leverage and risk, the equity has no value to us at all.

Sure, it is nice to think about the “extra money” we now have, but it has no value unless we do something with it. I have the same three choices as you have with your equity:

• Sell the home, reap the gain, and use the money elsewhere and lose current benefits!
• Let the home rent as it is doing and keep the tax benefits, the income and let the equity grow!
• Or, finally, borrow against the equity and invest the money in another way! 

With the first idea, you must assume that what you will buy returns more than what you have: I don’t know that to be the case. Not only that, but when you buy or sell, you must recover the costs you incurred during the process.

With the second idea, I know what I have, I know what I will continue to receive, and I know my profits.

With the last idea, we must increase our profits above what we have today, but we must also increase the return to pay the cost of borrowing for the new investment.  As a retiree, I tend to look at extra risk with a jaundiced eye. Don’t forget, with the last idea, you place more expenses on the home you leveraged.

Remember, I tend to be the Turtle – to wear my shell (safety) on my back and follow Friar Ockham’s Razor – “The simplest answer is usually the best.” With those in mind, I will tackle the last two ideas.

• The ability to reverse mortgage (I’ll tackle this last) and
• The functionality of the home where you are now living.  

I am well aware of the sentimental value we place in “things.” Our emotional attachment to ‘stuff or place’ is well documented.  I think that in the major life transition that is ‘retirement,’ we need to consider the additional values a smaller, simpler home can provide us. As well as the value of “moving.”

I have seen, over and over again, the effect moving has on those who retire. “People who change their lives to retire tend to be more successful in retirement.” Retirement is an unavoidable change. To try to avoid the inevitable change is to create new problems.

1. Do we need all the space we now have? The kids are gone, and ‘empty nesters’ can be rambling around in a place that, while familiar, is no longer functional.
   • Too much to clean
   • Too much to repair
   • Too much stuff we haven’t even seen in a year or more
   • And more monthly upkeep (utilities, etc.) than is necessary.
   • There is the possibility of renting out a room for additional income. That is doable, provided you want someone else in and out of your living environment in retirement – not something I would prefer, but others have done it successfully.
2. Do we understand the refreshing nature of a move? I know, from personal experience, that moving is a pain-in-the-butt! But it has an upside too:
   • You get to rid yourself of the emotional baggage of things you haven’t seen or used in years, and please don’t tell me you are “saving it for the kids.”  They don’t want it! 

There is a story here about my 150-year-old oak, claw foot expandable table (six inserts) that could seat four to sixteen people, complete with matching chairs!  I wanted to give it to my daughter before we moved to Italy. It was from my Gramma’s house, and Gramma got it from her mother. I grew up with that table – had my first beer and crab feast at that table! At first, my daughter thought she would paint it white to match her décor! Then maybe black!  I pointed out the value she would be losing, and finally, after taking it, she will send it to my brother.

• A new home with less space and fewer things allows us the mental and emotional freedom to make changes we might not otherwise think of, and I won’t even include the lower expenses.
  • A new home can be perfect for the new life that is ‘retirement.’
  • The extra savings from the old house sale can be an added value that enhances our freedom in the first, active years of retirement.

I have presided over several estate closings that included the home  “saved for the kids.” I know of one instance where the kids kept the home, now a rental. I know of multiple cases where the house was immediately sold for cash and split among the heirs after the estate sale. 

The Reverse Mortgage. (RM)

Much has been written, good and bad, about the reverse mortgage.  In essence, you give the house to the bank if payments to you exceed the appraised equity value at the time of the RM. Many feel it distasteful to live in a home that is owned by someone else!

I know people who have used the RM successfully could not have survived any other way and think it a lifesaver. It has its uses. 

I know of people who could have used it to stay in their home but were so turned off by the idea of not owning the house outright that they discarded the idea.

It is important to note that if you are doing an RM and you are married, you need the title to be in both names BEFORE you do the RM, and you need the title of the RM to be in both names. Otherwise, I have read that a bank will kick out the remaining spouse whose name is not on the title as they have no right to home. No love lost with bankers!

There is a great deal to consider with an RM, and while there is neither the space nor the time to consider everything here, I would caution that any RM that you get has a fixed interest rate. We are in a rising interest rate environment, and a variable rate RM could eat up your equity faster than a teenager eats pizza.

Like most things, a reverse mortgage has its drawback and its advantages: one advantage is that this is the only way I know of to eat your equity!

Summary:

Indeed, the equity in the home you are living in has no “cash” value. I would not include my home equity for future use in retirement unless I knew I would sell the home, buy another place to live, pay off the new house, and have cash left over. Then I would include the remaining money in my retirement assets. We all need a place to live. Living is an expense, and our home is an expense. I don’t include the place we live as an asset from which we can draw income to live on, and outside an RM, that is the long and the short of it!