Equity in Your CT Home and Retirement Income

Equity in Your CT Home and Retirement Income
Equity in Your CT Home and Retirement.  It’s not unusual for older people to be living in a nice home with substantial equity, but struggling to make ends meet with their retirement income. Here are three strategies to tap into that home equity:

1. Sell the current home and purchase a smaller one. This allows the homeowners to lower housing expenses, convert some equity into a lump sum that can be reinvested for income, and still have a home to live in. Consider current tax laws before using this strategy. If the owner lived in the home for at least two of the preceding five years before selling, single taxpayers can exclude $250,000 of gain from taxable income, while married taxpayers filing jointly can exclude $500,000 of gain.

2. Obtain a reverse mortgage. A reverse mortgage is a loan against the equity in a home that provides the homeowner with a fixed monthly payment, a lump sum, a line of credit that can be accessed when needed, or some combination of these options. By law, reverse mortgages are only available on a principal residence belonging to a homeowner aged 62 or older. The amount of the reverse mortgage is based on the value and equity in the home, the borrower’s age, and the interest rate charged by the lender. In general, higher amounts are loaned to older borrowers with higher home values. However, many lenders have maximum amounts that can be borrowed.

The principal and interest that accrues on the mortgage must be paid back when one of the following occurs: The home is sold; the homeowner permanently moves; the homeowner dies; or the pre-selected loan term ends. The amount that is owed grows larger over time, but cannot exceed the home’s value. If the home is sold for less than the amount owed, the lender must forgive the difference. Remember that the equity in the home is being reduced. Since the homeowner is receiving, not making, periodic payments, a regular income is not a requirement for a reverse mortgage. Fees to obtain a reverse mortgage can be quite high, so shop around.

From a tax perspective, interest is not deductible on your tax return until it is actually paid. In addition, payments received from the reverse mortgage are not subject to income taxes and are not considered income when determining the portion of Social Security benefits subject to tax.

3. Sell and then lease back your home. With a sale-leaseback, the homeowner sells the property to an investor and then rents it back from that individual. Typically, the seller receives a 10 to 20 percent down payment and a 15-year mortgage from the buyer. If properly structured, the mortgage payments will be larger than rental payments. Since the home is actually being sold, keep in mind the tax laws noted above relating to the sale of a residence. The interest portion of the mortgage payment received is ordinary income for tax purposes.

As you can see, there are various strategies that can be used to tap the equity in a home if cash is needed during retirement. Do you have Equity in Your CT Home and Retirement Income? Before implementing any of these strategies, however, review all available options with your elder care adviser and understand the ramifications of each one.

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