If you are like me and many other baby boomers, you probably own a house that has increased significantly in value over the past decade.
But tapping that nest egg – tempting as it may be to consider doing it through a sale of your house – is no simple decision and requires a lot of planning and thought.
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Why Cashing Out Isn’t as Easy as It Looks
The housing market this spring is one in which buyers and sellers remain a fair distance apart while mortgage rates are above 6%. Meanwhile, home prices remain stubbornly high, though appreciating at a slower pace, in some cases now below the rate of inflation.
Homes for sale are staying on the market longer, an average of 47 days in February – up from 42 days a year earlier. On top of all the financial constraints, there’s also the simple fact that the inventory of homes for sale offers would-be buyers fewer choices.
It all presents a challenge for retirees who want to downsize as well as homeowners seeking to sell the family homestead to buy a new home in the sun.
“There’s simply not sufficient inventory,” says Lisa Sturtevant, chief economist at Bright MLS, which serves the Delaware to Virginia region.
However, she adds that the problem is very localized, with Philadelphia having half the available homes for sale as it did in 2019, but states such as Delaware, Florida and Tennessee having built more homes in recent years.
But for those looking to sell, whether to move to a warmer locale or downsize to a house that requires less maintenance, there are some things to consider.
Start With the Why: What’s Driving Your Move?
Even though Florida and the Carolinas pop up frequently as places to retire, most people tend to want to stay close to their families – especially if they have grandkids. And for those ages 65 to 74, more than a third have paid off their mortgages. That may mean that current mortgage rates – now above 6% for a 30-year fixed rate loan – are not as much of an issue.
And even if a small mortgage is needed, the difference in current rates and the lower-rate loans that were common five years ago may well be offset by lower property taxes, or homeowners association dues, or even the reduced cost of maintenance.
Renting Could Offer Flexibility – and Less Risk
Builders increasingly are focusing on the rental marketplace. A person in their late 60s or early 70s may find that appealing and choose instead to cash in the equity they have built up in their homes by selling. That money can then be invested to generate enough cash, or close to it, to cover the rent.
“If you are renting, you won’t have to pay property taxes, HOA fees and maintenance,” says Zac Murphy, an accountant who is the founder of Waterfall Planning, an online budgeting site.
Renting is also a good way to explore an area to make sure you really want to move permanently to a new place.
For those worried about the taxes due from any sale, the Internal Revenue Service allows those who have owned and lived in their homes as a residence for two out of the five years prior to a sale, an exemption of $250,000 for single and $500,000 for married joint filers on any capital gains they might have made on the house.
Alternatives to Selling: Other Ways to Use Your Equity
If you are mainly concerned about tapping the equity in your home and don’t plan to leave it for your heirs, or have none, then you might want to research reverse mortgages and home equity loans. Each has their pros and cons and it is well worth consulting a financial advisor or tax expert before choosing to proceed.
Reverse mortgages allow homeowners 62 and older to receive payments from a lender instead of making monthly mortgage payments – but they come with fees and reduce your equity over time.
Home equity loans are more straightforward. You commit to paying back a set amount for the loan over time but you receive a lump sum of cash to maybe pay medical bills or other expenses in retirement.
For a few years now, the “lock-in” effect – homeowners who financed at historically low interest rates during the post-COVID era and have been unwilling to sell to take on a more expensive loan – kept a lot of older Americans out of the housing market.
But that chokehold is easing. In 2022, the percentage of those with mortgages below 4% stood at 65%. It is now down to 52.5% as of December, concentrated among older Americans. And a third or more of seniors have no mortgage at all.
So, the situation is improving for those looking to make a move. But it is still a very personal decision, especially if it involves selling a home that your family grew up in. It’s best to consider all your options and do your research.