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Using Your Home Mortgage in Your Retirement Planning

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Planning your long-term use of your home's equity prior to retiring helps determine what kind of mortgage to place on your home. For most Americans, their home is the biggest investment they'll make and asset they may ever own. Even though retirement age may seem far away, it seems to arrive to soon with the realization that social security and retirement income are not enough to maintain current lifestyles.

Besides using any IRA and 401(k) plans to build up assets, your retirement financing may include a plan for how much extra to pay on your mortgage's balance to accelerate the amount of equity in your home.

To estimate how large an asset your home will be at retirement, figure the equity from paying the mortgage plus the appreciation of the home. Five and half percent is a conservative number to use figuring the increase in value. Even with the cyclic nature of real estate values, the historical average increase over the years is usually in the 5.5% to 6% range. Of course there may be situations unique to your neighborhood that may cause home values to shift from the historical averages.

Four Approaches To Retirement Financing With Home Mortgages

Loan officers at credit unions, mortgage brokerages and banks can help home owners assess their mortgage packages with an eye to retirement planning, including a phased approach to retirement asset building that may include:

  • Sell your large home to buy a smaller home and cash out on your home's equity;
  • Buy a "vacation home" that will become your post-retirement residence;
  • Plan for a reverse mortgage later in your retirement; or
  • Consider moving to a town where the cost of living, weather, neighborhood safety and quality of healthcare is better.

Full Home Ownership. Owning your home 100% by the time you retire eliminates the monthly rent or mortgage expenditure, leaving only insurance, maintenance and taxes to cover. By using a fixed rate mortgage, you can own your home in 15 or 30 years. You will then be in a position to sell the home and take your equity - and the home's appreciated value - to buy a smaller home and enjoying getting the cash for the difference in the properties.

Buying your retirement home as an investment property. Working with a real estate agent who specializes in investment properties and knows the retirement property market, you may consider buying a second home in an area to which you wish to retire. Especially if the home is in a vacation area, the second home can be rented out to cover all or most of its mortgage payments.

Upon retirement, you can sell your larger home and move into the second home. In this retirement financing scenario, the funds from the sale of the first home provides capital for living or investing, while the second home would be less overhead with, usually, some equity built up, if not owned outright. This strategy also gives you the freedom to sell both houses and move to another property that you find appealing.

Reverse Mortgages. A reverse mortgage from your credit union or bank allows a homeowner to get cash for part of the equity in their home and use the rest of the equity to cover the mortgage's interest. Since the owner's age and equity in the home are the largest determinants for eligibility, living on a fixed income is not a problem as it would be for a traditional mortgage.

Unlike a traditional fixed or adjustable rate mortgages, a reverse mortgage has no monthly payments. The cash the homeowner receives is usually around 60% of the home's appraised value. Your home can never be sold by the lender or foreclosed upon as long as one of the borrowers retains the home as their permanent residence. For FHA loans, you must be 62 years of age or older and fully or mostly own either a single-family home, an apartment, condominium, townhome or a manufactured home that meets FHA building standards.

For an FHA backed reverse mortgage, borrowers attend a counseling session to determine if this is the correct loan for your retirement situation. The best benefit for retirees is that they can receive their cash as a lump sum or in monthly payments. Though these payments may affect your Supplemental Security Income and Medicaid payments, they are not taxable. Reverse mortgages do not establish an escrow account for insurance and taxes - those remain the responsibility of the homeowner.

Talk to your financial advisor or your local credit union or bank loan officer to find out how you can use your mortgage and real estate investment to best position yourself for your retirement. With fluctuations in the buying power of the dollar, real estate has long been an avenue to both preserve wealth and weather the little reported deflationary monetary policies of the central bank.

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