How To Turn a Paid-Off House Into Reliable Retirement Income — Without Downsizing
Written by
John Csiszar
Edited by
Jenna Klaverweiden
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The greatest source of net worth for most Americans is their home. And many retirees may be sitting on a lot of equity if their home is paid off.
While more equity isn’t a “problem” per se, it can create an issue. Seniors need income to make it through retirement, not assets. If most of their net worth is tied up in the home in which they live, it can be a challenge to unlock that wealth. Fortunately, today’s homeowners have multiple ways to leverage a paid-off house that don’t include downsizing and moving out. Here are some potential options.
Also see the top three sources of retirement income.
Rent Out a Portion of the Home in Which You Live
By the time they retire, many seniors have too much home for their needs. If your kids have moved on with their lives and you’re living as a single person in a five-bedroom, four-bath house, for example, you’ve got room to spare.
One way to generate some income is to rent out the unused portions of your home. Your extra bedrooms are an obvious choice, but you can also get creative and rent out your basement, your garage or even your driveway if you don’t need it yourself.
Long-term rentals can provide predictable monthly income, but short-term rentals can also generate high seasonal returns in the right market.
Before taking this step, it’s important to understand the tax ramifications of rental income, along with local zoning laws, homeowners association rules, state regulations and insurance requirements.
Build an ADU
Accessory dwelling units, or ADUs, are becoming popular ways for retirees to convert home equity into long-term income. Often called “mother-in-law suites” or simply “backyard cottages,” ADUs are simply add-on structures that can be rented out as separate dwellings.
Depending on location and size, ADUs could generate between $1,500 and $3,000 per month, and they’re often in demand. In fact, many states and cities now actively encourage homeowners to build ADUs to help ease housing shortages.
Strategically Use a Home Equity Line of Credit
A home equity line of credit, or HELOC, allows you to borrow against the value of your home. HELOCs function something like credit cards as opposed to traditional loans. Per the Consumer Financial Protection Bureau, you can draw from the equity in your home for a certain period of time and make only minimal payments on the amount you borrow. If you haven’t paid the money back by the end of the initial draw period, which is often 10 years, you enter the repayment period, during which payments substantially increase.
HELOCs offer financial flexibility, as they give retirees access to home equity on demand. This equity is often used to bridge income gaps without selling investments during market downturns. However, they must be handled responsibly, as eventually you’ll have to pay that money back, with interest.
Consider a Reverse Mortgage — but Tread Lightly
A reverse mortgage allows you to continue living in your home while receiving tax-free checks representing your equity. Payments can be taken as monthly income, a line of credit or a lump sum by homeowners 62 and older who qualify. The loan is repaid when the home is sold or when the homeowner permanently leaves. Oftentimes, this happens when heirs inherit the property after the homeowner’s death.
It’s important to understand that a reverse mortgage is still a loan that carries fees and interest. As you accept payments, your outstanding balance to your bank will increase every month. The Consumer Financial Protection Bureau also emphasizes that reverse mortgages are often the target of scammers.
This is definitely an area in which you should consider working with a financial professional in terms of assessing your choices.
The Bottom Line
If you’ve got the bulk of your net worth tied up in your home, you may have more options than you think when it comes to accessing it. Whether through rental income, building an ADU, using a HELOC or otherwise converting equity into income, there’s likely a way you can generate reliable retirement income, all without downsizing.
The right choice will come down to your health, location, risk tolerance and long-term goals.
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