Money on the House

WITHDRAWING EQUITY FOR THE HOUSE-RICH AND CASH-POOR

by Ralph Warner

It's an excellent preretirement strategy to purchase and pay for a house while you are working. If you do, the amount of money you'll need to save for retirement will be substantially less than if you rent or still have a mortgage, since your postretirement housing cost will be relatively low. The only exception is if you live where property taxes are very high, in which case you may wish to consider moving.
But if you haven't been able to save much and must live primarily on Social Security income, owning a house means that the lion's share of your assets are tied up in one place. Or, put another way, you may find that you are house-rich and cash-poor, with the obvious result that you are strapped for money to live on. Fortunately, this isn't nearly as big a worry as it used to be-with a little planning, there are several good ways to have your house provide you with income after you retire.

Rent Out One or More Rooms
Especially if you live near a college, resort area, or a community that is growing rapidly, it may be fairly easy to bring in substantial monthly income by renting one or more rooms. And it will probably be even easier in the future, since a number of senior organizations are beginning to establish programs to match older people who need good affordable housing with other retirees who have space to rent. To be sure, many people shy away from the idea of renting space in their homes out of fear of losing privacy or getting a troublesome tenant. But by using the good planning and screening techniques developed by many senior organizations, it really should be possible to rent surplus space comfortably.

Move to a Less Expensive Home
If you purchase a significantly smaller, less costly house or condo, you can bank a significant amount of the equity in your original house and use the income it produces (and eventually part of the principal) for living expenses.
EXAMPLE: Dot and Harry own a nice house within commuting distance of a good-sized midwestern city. When Harry retires at age 67, they sell their house for a net of $240,000 after sales costs. They then purchase a nearly-new condo on the outer fringe of a resort area in southern Colorado for $80,000. Thanks to a law that allows homeowners over 55 to trade down and pocket $125,000 in profit capital-gains tax-free, Dot and Harry owe no federal capital gains tax and thus can invest all their net proceeds, which total $160,000. They plan to withdraw about $15,000 of this nest egg each year to supplement their Social Security income. Assuming that they will invest in a mix of stock and bond mutual funds that produce an annual return of 8 percent, this means their money will last 20 years.

Sell Your House and Become a Renter
Especially if you want to live in a smaller space, with someone else responsible for maintenance and repairs, renting can sometimes be a sensible and affordable strategy. And it will free a substantial portion of the equity in your original house for other needs.
EXAMPLE: Shae, age 72, widowed, sells her four-bedroom house for $400,000. Because of estate-tax laws, which allowed her to increase the dollar amount on which capital gains taxes are figured at her husband's death, and because she hasn't previously taken advantage of the over-55 tax deduction, no capital gains tax is due, and she can invest all $400,000. Assuming she buys a mixture of growth-oriented mutual funds and U.S. government securities paying an average annual return of 8 percent, her annual income, before tax, will be almost $32,000 without touching the principal. Combined with Social Security, this should be more than enough for her to rent a decent apartment and live comfortably.

Get a Reverse Mortgage
If selling the family house and moving to a smaller place is unpalatable, and you want to stay in your own house until the day you die, you may want to consider a "reverse mortgage, now available to many senior home owners. As you may know, the idea is simple: you, the home owner, trade some or all of your equity in your house in exchange for a monthly payment from a bank or other lender. The payment can be in cash or in the form of a line of credit you can draw on as needed. After your death (or if you move out), the house is sold and the lender repaid (plus interest, of course). Whatever is left over goes to your heirs.
For example, the Federal National Mortgage Company (Fannie Mae) offers the "Homekeeper Mortgage," designed to let anyone over 62 who owns all or most of a house borrow over $200,000 worth of its equity in the form of an adjustable rate reverse mortgage. Prepayment is required when the borrower moves, sells the property, or dies.
For retirees who have substantial equity accumulated in their houses but need money to live on day to day, a reverse mortgage can be a good fit. Home owners have the opportunity to work out a plan that will let them withdraw substantial amounts of money for years and still not be close to the reverse-mortgage maximum, which is often about 80 percent of the owner's equity interest. And, of course, there is also a good chance that, short of a deep and lasting recession, the house's value will increase over time, meaning that the amount one can draw against is also likely to increase.

From Get A Life: You Don't Need a Million to Retire Well, by Ralph Warner. 1996 by Ralph Warner. Excerpted by arrangement with Nolo Press. $18.95. Available in local bookstores, or by calling 800-992-6656.


MORE ABOUT REVERSE MORTGAGES
In the past, making accurate comparisons of reverse mortgages was tricky, but now the U.S. government requires all issuers of reverse mortgages to disclose total mortgage costs, including interest and all fees and closing costs, as a percentage of the loan.
For a list of reverse mortgage lenders, see the book Your New Retirement Nest Egg: A Consumer Guide to the New Reverse Mortgages, by Ken Scholen (NCHEC Press). Available in local bookstores, or for $24.95 from NCHEC Publications, 7373 147th St. West, Apple Valley, MN 55124.