What To Do With All of That Home Equity

If you're a homeowner, 50 years of age and older, your home likely represents a significant portion of your net worth.

Home values have steadily risen since the financial crisis.  The Federal Reserve Bank of St. Louis estimates home equity is now close to $15 trillion, a record.

For older Americans, a home can represent as much as 70% of their net worth.  A condition known as house rich and investment portfolio poor which poses risks to diversification, liquidity and cash flow.

If you're in this situation, you might be wondering what to do.  You need to balance financial, lifestyle, and emotional concerns.  Realistically, you have three options, each with its own set of trade-offs:

Strategy 1:  Sell

Unlock your home's equity by selling.  Decide whether to downsize or rent.  Invest the proceeds, diversify your holdings, and consider an income generating strategy that enhances cash flow.  Your financial situation will improve but you'll have to weigh the impact moving has on your lifestyle and emotional well-being. 

Strategy 2: Take a reverse mortgage

If you're 62 years of age and older, you're eligible for a reverse mortgage.  You can stay in your home while taping its equity.  Borrowers can take a loan in lump-sum or as a line of credit.  It can seem like an ideal solution but be aware of the high commissions and complicated rules.

Strategy 3: Stay, and use your home as part of your estate plan

As Christine Benz of Morningstar points out, there are tax benefits to remaining in your home.  Although subject to property taxes, you won't have to pay ongoing income and capital gain taxes like an investment portfolio.  With the step-up rule you can pass your home to heirs at the current market price instead of purchase price.  Another benefit, homes aren't generally included in the asset count that determines Medicaid eligibility.  These are all positive reasons for staying but don't address the fact that a substantial portion of your net worth remains tied up in your home.  

As a fiduciary and fee-only advisor, I don't make money by selling financial products.  I'm free to recommend the strategies and investments that make sense for couples and individuals, based on a clear understanding of where you're headed in life.  

If an open conversation of this kind will be helpful to you, request an appointment now.  Feel free to call out any specific questions you'd like me to address.

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*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.