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Owning a Home Can Help Fund Retirement

Buying a home is the biggest financial endeavor most Americans will make in a lifetime. The advantages of owning a home are numerous, and the journey from dreaming of homeownership to being handed to keys to the home’s front door is a reality that takes place countless times every day.
Becoming preapproved, selecting a real-estate professional, finding the home that grabs your heart, and sealing the deal at closing are steps filled with an immense amount of eager anticipation.

Anyone who has, ever, sold their home is aware that a huge benefit of home-ownership can be the accumulation of personal wealth, by way of built-up equity. Equity can be used for any number of ‘here-and-now’ endeavors such as paying off credit-card debt or adding home amenities such as an outdoor kitchen or a screened-in porch. But equity – as part of net worth – can be factored into the bigger financial picture of helping to boost retirement savings.

When a home helps to fund retirement, it means the home’s financial potential can play a key role in the homeowner’s monetary strategy for the future. It has to do with making retirement more enjoyable by eliminating, or drastically reducing, one’s debt load.

Homeownership can bolster one’s retirement account when the homeowner chooses to:

Eliminate High Interest Debt

High-interest credit-card debt or other unsecured debt can be paid off via a home’s equity through the use of a home-equity loan or home-equity line-of-credit, with much lower interest.  The monetary difference could be applied, directly, to the mortgage loan’s principle.  This, of course, would allow the original loan to be paid off sooner.  One should make sure, however, there are no pre-payment penalties with paying a mortgage loan earlier than planned, and one should repay an equity loan or equity line of credit as quickly as possible.  

When a home is paid off by retirement age, life without a monthly mortgage payment becomes a dream-come-true.  A mortgage-free home provides financial security during retirement, especially if one were on a fixed retirement income.

Downsize To a Smaller Home

Many older homeowners choose to downsize once their children are grown since they no longer need four bedrooms, four bathrooms and 3,000 square feet of living space.  If downsizing involves moving into a smaller home, that can translate into much smaller mortgage payments.  The equity from the sale of a once-larger home has the potential to cover 20% closing costs for the smaller home with a sizable amount of equity money left over.  The leftover equity can be used towards paying off existing debt as well as contributing towards a more-sizable nest egg.  It is not unrealistic for homeowners to take their substantial equity and use it to buy a less expensive home, outright, and live mortgage-free.  The money that would have, otherwise, been used for a mortgage payment can help to fund one’s retirement.

Refinance to a Shorter-Term Loan

If circumstances in your life become embedded with a financial bonanza – an inheritance, for example, or an unexpected increase in pay – you could be in a position to refinance your current loan into a shorter-term loan.  This could make a huge difference with having more money, sooner, for retirement.  For example, if you have a 30-year mortgage and switch to a 15-year mortgage, your dream of being mortgage-free at, or before, retirement could become a reality.  Switching to a 15-year mortgage would mean less accumulated interest, a faster build-up of equity, a lower interest rate, and a quicker pay-down of the principal.  If you were able to, consistently, handle the higher monthly payments of a shorter-term loan, your retirement would be looking mighty bright!

The Bottom Line

For homeowners with a hefty amount of equity, their homes can become, in essence, ‘money trees’.  The decision to transform a certain percentage of a home into working capital to help fund retirement must be made carefully and would be dependent on individual circumstances.  Equity can build up into a princely sum that can serve homeowners very well before and during those Golden Years.  


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