Home Equity Is Not a Retirement Plan

Paying off a house is a retirement goal for many people, but don’t count on equity to compensate for insufficient savings.

If you have a low-interest home loan, shortchanging your retirement contributions to pay it off early usually isn’t a good idea. Here are some of the limitations of relying too much on home equity in retirement.

      * What happens if you need to go to a nursing home? Selling your home to fund a move to a nursing home only works if your spouse can arrange for other accommodations or is moving into the home with you. Also, your equity may not be enough to cover the costs.
      * Equity isn’t fixed. Home prices rise and fall, and if you’re not maintaining your home, that could also affect its value. Plus, translating equity into cash takes money and time.
      * The cost of selling. Commissions generally eat up 6% of the final sale price of your house. On top of that, you have possible capital gains taxes. While $250,000 (or $500,000 for couples) of capital gains is tax-free, years from now inflation and appreciation could make that amount seem meager. And if you have to sell quickly due to an emergency, you might have to accept a lower offer than you’d like.
      * Beware of reverse mortgages. This type of loan gives you money to live on for the rest of your life based on the equity in your home, and it allows you to continue living there. But you typically get considerably less than what the home is worth, and the loan becomes due if you ever move.
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