Money Strategies for Your Home – February 24, 2008
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
February 24, 2008
Money Strategies for Your Home
February 24, 2008
For many people, their home is their single most valuable asset. Often, assets other than the home are modest, consisting of a small pension, Social Security and a relatively small retirement account such as an IRA. Here are some strategies for turning your home into a productive asset.
Downsize. I have had a number of retirement clients who have chosen to sell their home and purchase a smaller one, thereby releasing a portion of their equity that they can use for other purposes. The reasons for this are many. In some cases, they simply wanted a newer home with less maintenance, less taxes and little or no yard. Others wanted a smaller home where all the living space was on one level. The equity that is released can be added to their investment account and used to increase their retirement cash flow. Many people do not understand the tax benefits of such a move. Current law allows a homeowner to sell his or her primary residence and avoid paying any taxes on the first $250,000 of profit. For married couples, the tax exempt amount is $500,000. Any profits above the tax exempt amount are taxed at favorable long-term capital gains rates (15% federal). Imagine being able to take up to $500,000 of profit tax-free and invest those proceeds into your personal investment account to increase your cash flow! If this is a strategy that fits your situation, consider not only downsizing, but also moving to a less expensive housing area. For example, if you live in affluent communities such as
Reverse Mortgage. If you have a strong desire to stay right where you are but need additional cash flow during retirement, consider a reverse mortgage. To qualify for a reverse mortgage, you and your co-owner, if you have one, must be age sixty-two or older. Lenders will typically offer a reverse mortgage of approximately 50% to 60% of the value of your home with monthly payments paid to you for as long as you live in your home. Once you move out, the mortgage must be repaid, typically through the home sale, but you are not responsible if the home sells for less than the mortgage balance. Any excess equity from the home sale is returned to you. These payments to you are not subject to income taxes and will not affect your Social Security.
Refinance. The new economic stimulus package offers a unique opportunity for some homeowners. Conforming loans are loans that typically offer the best interest rates and, until the new law, were limited to loans up to $417,000. The new law increases this limit to up to $728,750, depending on your geographical location. If you currently have a mortgage based on a non-conforming loan (loans more than $417,000), you may benefit by refinancing. Not only may you now qualify for lower conforming loan rates, but mortgage rates are currently in the 5% – 6% range. Anyone who has an adjustable rate mortgage should review current fixed rates and decide if ‘locking in’ a long-term mortgage would be beneficial.