How to Use Your Home Equity to Build a Nest Egg

Most often when financial advisors go over a retirement investment plan, they’re discussing things like buying into stocks or mutual funds and managing portfolio risk. But you usually won’t hear them mention something that could be key to your retirement strategy. One of your most valuable assets—your home—can provide equity that you could use to turn into a huge nest egg. Here are some important things you should know about doing so:

Have a Plan for Increasing Your Home’s Value

The earlier you start, the more comfortable your golden years will be. Along with increasing your equity by paying down your mortgage, you want your home to bump up in value. But you want to be careful in how far you go to make upgrades and renovations because you don’t want to drag out the debt on your home for too long in doing so, not to mention the potential increase in property taxes that come with increasing your home’s value.

Also, consider that at least half of homeowners expect to spend at least $25,000 on home renovations. You want to make sure those dollars count and turn your home into something future buyers will be willing to pay more than market value for.

Know What Selling Your Home Means for Capital Gains Taxes

In almost every investment made outside an IRA, you have to pay capital gains taxes once you’ve decided it’s gained enough in value that you’re ready to sell it. With a home, things are a little different. With the new IRS code that went into effect in early 2018, you could exclude up to $250,000 in gains on the sale of your home if you’re an individual tax filer, or $500,000 if you file taxes jointly with your spouse. The only requirement is that you need to have lived in the house for at least 24 months over the last five years. But that means if you’re a joint tax filer, and you bought a home for $150,000 that you lived in for two years, and then sold it for $650,000, that $500,000 is yours to pocket tax-free.

Using Different Mortgages to Leverage the Equity in Your Home

Getting a second mortgage or borrowing against the equity in your home may or may not be the best way to leverage it for your retirement needs. But a mortgage lender who offers lower interest rates and favorable refinancing terms may offer good second mortgage options like a cash-out refinance mortgage for you to use for important financial needs. There’s also a reverse mortgage option which is almost like borrowing income for retirement, but you need to be careful about the legal ramifications surrounding it.

Selling and Investing The Proceeds

One way to make sure your home’s equity is maximized in retirement is to sell it and downsize your next home, and then use the rest of the proceeds to invest in a retirement fund. That may be through a standard brokerage account, or you may want to buy an annuity to guarantee income throughout retirement. There’s a variety of ways you could invest the proceeds depending on how conservative or aggressive you want to be.