You’ve heard the concept before – the kids are out of the house – Mom and Dad retire… so it’s time to sell the big ole house and downsize. Equity in the home that exceeds the price of the new place can be used to create retirement income. I’ve been through this with several couples, and often the downsize is actually an ‘upscale’ to a smaller place in a better locale with more amenities and thus higher cost. So often there’s no financial benefit to the move.

You’ve spent 30 years building up 100% equity in the house – so whether you downsize and upscale or not… should home equity be used to enhance retirement income?

Your home is an integral part of your aggregate financial picture, but many planners exclude it from income planning. We tend to focus on more liquid investments like stocks, bonds and alternatives. That’s because taking out a traditional loan against a house will trigger monthly payments that will need to be accounted for in monthly cashflow. And selling a home to harvest the equity would require finding another place to live. 

One easy way to get the equity out was to use some form of a reverse mortgage. I’ve looked into many of those contracts, and the amount of equity that is claimed by the lender in the early years seems egregious to me. So, unless there are ‘reasonable’ contracts out there – I would stay away from a reverse mortgage unless it is the absolute last option.

Utilizing home equity may be an option even if there are other assets that could be used for income. If one has huge capital gains that would be realized if sold – triggering big tax bills, it might make sense to take a Home Equity Line of Credit loan for some income. At death – under current conditions – the highly appreciated investments will be stepped-up in value so heirs will not pay capital gains. A HELOC might be a solution if there are losses in investments that they may not want to sell while underwater.