Housing News

More Homeowners Are Counting on Their Homes to Help Fund Retirement

For generations, a home was viewed primarily as a place to live and, ideally, something to own free and clear by retirement.

Today, many homeowners see it differently.

More than half of homeowners (58%) plan to use their home to help fund retirement, according to a new survey from Clever Real Estate, a national real estate company. The most common strategy is selling and downsizing. Though others expect to rent out their home, tap home equity, or move in with family.

The findings reflect a growing shift in retirement planning. As home values have climbed over the past decade, many homeowners increasingly view their home as both a place to live and one of their largest financial assets.

“When it comes to deciding whether to pay off a mortgage before retirement, there’s no one-size-fits-all answer,” said Brent Meyer, founder of SafeMoney.com, which provides retirement guidance. “I’ve seen many clients grapple with this choice, and it often depends on their individual financial situation and comfort level with debt.”

Financial professionals say a home can play an important role in a retirement strategy. However, it should complement retirement savings and other investments rather than replace them.

Here’s what homeowners should know before making their home part of their retirement plan.

Home equity can create more options in retirement

Years of rising home values have left many homeowners with substantial equity, creating some financial flexibility in retirement.

Many retirees choose to sell a larger home and downsize, freeing up cash that can supplement retirement income while lowering monthly housing costs. Others relocate to areas with lower property taxes, homeowners insurance costs, or everyday living expenses.

Homeowners who prefer to stay put may decide to tap into their home equity instead.

Depending on their financial goals, homeowners may consider a cash-out refinance, a home equity line of credit (HELOC), or a second mortgage. Each loan allows you to access your home equity but works differently.

Cash-out refinances are new mortgages for more than what they owe on their loans. They can then pocket the difference and repay the new mortgage every month.

A HELOC works similarly to a credit card. Homeowners who qualify can receive up to a certain amount that they can use as much or as little as they like during the draw period, typically over five to 10 years. Then they repay the loan, generally over the ensuing 10 to 20 years.

Second mortgages are new loans made in addition to a homeowner’s existing home loan.

The right choice depends on interest rates, monthly cash flow, retirement income, and how the money will be used.

“For some retirees, the peace of mind that comes with being debt-free can outweigh the benefits of keeping the mortgage and investing extra funds elsewhere,” said Meyer. “Others may have a low-interest mortgage and choose to maintain it, hoping to earn more with their investments.”

Since these loans involve borrowing against home equity, homeowners should compare costs, repayment terms, and long-term financial goals before moving forward.

Housing costs don’t disappear in retirement

Owning a home free and clear doesn’t mean housing costs disappear.

About 87% of homeowners say housing expenses affect their ability to save for retirement, according to the Clever survey.

Property taxes were the biggest concern, cited by 49% of homeowners. Homeowners insurance followed at 43%, while 40% pointed to utility bills.

Maintenance, repairs, and other unexpected home expenses continue throughout retirement, making it important to build those costs into a long-term financial plan.

Should you pay off your mortgage before retirement?

Many homeowners hope to retire without a mortgage payment.

The Clever survey found that nearly one in five homeowners don’t expect their mortgage to be paid off by the time they retire.

Whether that’s a problem depends on a homeowner’s overall financial picture.

“You shouldn’t assume that paying off a mortgage before retirement is the best option,” said Jacob Bayer, a licensed financial planner and founder of Jacob Bayer Wealth Management in Spring Valley, N.Y. “It is a liquidity decision and stretches beyond financial calculus.”

Bayer said homeowners who drain their investment accounts or emergency savings to eliminate a mortgage could leave themselves with fewer financial options.

“You are left with a paid-off home that gives you no flexibility,” said Bayer.

For homeowners with a low fixed mortgage rate, preserving investments and maintaining a cash reserve may provide greater financial flexibility than paying off the loan as quickly as possible. Others may place a higher value on entering retirement without a monthly mortgage payment.

Plan well before retirement

Many Americans are already figuring out how to balance today’s housing costs with tomorrow’s retirement needs.

More than one-third of workers (38%) said they reduced retirement contributions during the past year, while nearly one in five (18%) said they have never saved for retirement.

Working Americans expect to retire with about $515,000 in savings. That’s roughly half of the $1,027,520 financial experts recommend for a 20-year retirement on a median salary, according to the survey.

Reviewing retirement savings, estimating future housing costs, understanding how much home equity you have, and talking with both a financial planner and a mortgage professional can help homeowners make informed decisions long before they leave the workforce.

“I typically encourage clients that if the mortgage rate is low and the portfolio is doing the investing, then retiring with the mortgage and cash cushion is better than being house rich and cash poor,” said Bayer. “The only exception is if the mortgage payment significantly reduces the financial comfort of the fixed retirement income.”