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Homeowners Are Sitting on Record Equity: How You Can Capitalize For Retirement

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If you own a home, chances are your net worth has shot up in the last year. Skyrocketing  home prices caused by a pandemic-fueled real estate frenzy have led to a scenario where homeowners in the U.S. are sitting on a record $22.7 worth of home equity after gaining $2.7 trillion in equity over the last year, according to a new report. If you’re approaching retirement and looking to tap your home’s equity, there are several strategies you may want to think about, from downsizing to taking out a reverse mortgage.

A financial advisor can help you integrate your home equity into your retirement plan. Find one today.

Rising Home Values

U.S. home prices have surged in the last year at a rate not seen in four decades, according to research published by Unison, a home co-investment company. Citing the S&P CoreLogic Case Shiller Home Price Index, Unison noted that home values were 18.6% higher in June than they were a year earlier.

As prices have skyrocketed, so too has home equity, which is measured by the home’s value minus mortgage debt. By July, 49 of the largest 50 metropolitan areas had recorded at least a 10% increase in median home equity from the previous year, according to the report. Meanwhile, all but four states also saw home values jump by at least 10% from a year earlier .

Home equity is highest in the San Jose-Sunnyvale-Santa Clara, California metro area, where the median home value is $1.33 million. Homeowners in the greater San Jose area have an eye-popping $950,271 in home equity, according to the Unison research.

But no place has seen as large of a leap in median home equity as the Phoenix-Mesa-Chandler metro area in Arizona. There, homeowners gained 28.7% or $42,112 in home equity over the last year, as the median home value rose to $336,895.

“Driven by strong housing demand and tight supply, aided by government support and near rock-bottom mortgage interest rates, home prices have not taken a hit during the COVID-19 pandemic,” the report’s author, Winfield Xu, wrote. “As a result, there have not been many notable decreases in home equity values in large metropolitan areas.”

How to Convert Home Equity into Retirement Savings

But the question remains: How do you convert all of this home equity into money for retirement? Here are several strategies for tapping your home’s equity.

Downsize to a smaller home or a rental

The most obvious option is to sell your home, purchase a smaller one and pocket the difference. Some retirees who downsize forgo buying a new home altogether, and opt to rent instead. These retirees are less likely to be interested in building equity in home over the course of several decades and instead view their home as an expense, not an investment.

Cash Out Refinance

For retirees who don’t want to move, a cash out refinance may be a viable option. A cash out refinance is a new loan that replaces your existing mortgage. While other types of refinancing can result in a lower interest rate or change the length of your mortgage, a cash out refinance leaves you with a new mortgage for an amount that exceeds what you currently owe. You then collect the difference in cash.

While the cash out refinance will produce a lump sum of tax-free cash, there are risks and drawbacks associated with this type of transaction. In addition to paying closing costs, you also give up the equity you’ve presumably worked to build. And if the value of the home drops, you could end up owing more than the home is worth. Then again, if you’re committed to staying in your home and your retirement income can cover your monthly mortgage payments, a cash out may be an option for you.

Reverse Mortgage

If you’re at least 62 years old, you may qualify for a reverse mortgage. Like a cash out refinance, a reverse mortgage allows a homeowner to tap the equity in their home to cover expenses or meet income needs in retirement. Unlike a cash out refinance, though, you can receive the cash in monthly installments, a line of credit or a lump sum payment.

A reverse mortgage loan only needs to be repaid if you pass away or if your home is no longer your primary residence. If you die after taking out a reverse mortgage, your heirs will either need to sell the property or use other funds to repay the loan and maintain ownership of the home.

Convert Your Home Into a Rental

Retirees with the energy and willingness to be a landlord can combine some of the above strategies to create a new income stream. If you own your home outright, you can take out a mortgage on the home and use the cash infusion to cover your retirement expenses, including a buying a smaller home or renting an apartment. By converting your primary residence into a cash-flowing rental property, you’ll hang on to the home and use the monthly rent to cover your mortgage payments. pocketing whatever’s left over. Assuming the property remains rented, it will be a valuable asset to leave to your heirs as part of your estate.

Bottom Line

The massive gains the housing market has made in the last year have homeowners sitting on $22.7 trillion in home equity, according to a report from Unison. If you’re approaching retirement or have already retired, tapping the equity in your home can be a viable way to supplement your retirement income. Downsizing, cash out refinances and reverse mortgages are all ways to convert home equity into cash for retirement.

Retirement Planning Tips

  • Social Security is an important piece of the retirement planning puzzle for many people. Knowing how much your benefits will be is vital to creating a plan that supports the lifestyle you want to live in retirement. SmartAsset’s free Social Security Calculator can estimate how much your benefits will be based on your age and income. Give it a try now.
  • A financial advisor can help you plan for retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.

Photo credit: ©iStock.com/Andrii Yalanskyi, ©iStock.com/Zinkevych, ©iStock.com/twinsterphoto

Patrick Villanova Patrick Villanova is a writer for SmartAsset, covering a variety of personal finance topics, including retirement and investing. Before joining SmartAsset, Patrick worked as an editor at The Jersey Journal. His work has also appeared on NJ.com and in The Star-Ledger. Patrick is a graduate of the University of New Hampshire, where he studied English and developed his love of writing. In his free time, he enjoys hiking, trying out new recipes in the kitchen and watching his beloved New York sports teams. A New Jersey native, he currently lives in Jersey City.