Email FacebookTwitterMenu burgerClose thin

Homeowners Are Sitting on Record Equity: How You Can Capitalize For Retirement

Home values and home equity have skyrocketed in the last year, according to a report from Unison.

If you own a home, chances are your net worth has shot up in the last year. Skyrocketing home prices caused by a pandemic-fueled real estate frenzy have led to a scenario where homeowners in the U.S. are sitting on a record $22.7 trillion worth of home equity after gaining $2.7 trillion in equity over the last year, according to a new report. If you’re approaching retirement and looking to tap your home’s equity, there are several strategies you may want to think about, from downsizing to taking out a reverse mortgage. You can speak with a financial advisor to help you integrate your home equity into your full retirement plan.

Home Values Have Increased

U.S. home prices have surged in the last year at a rate not seen in four decades, according to research published by Unison, a home co-investment company. Citing the S&P CoreLogic Case Shiller Home Price Index, Unison noted that home values were 18.6% higher in June than they were a year earlier.

As prices have skyrocketed, so too has home equity, which is measured by the home’s value minus mortgage debt. By July, 49 of the largest 50 metropolitan areas had recorded at least a 10% increase in median home equity from the previous year, according to the report. Meanwhile, all but four states also saw home values jump by at least 10% from a year earlier.

Home equity is highest in the San Jose-Sunnyvale-Santa Clara, California metro area, where the median home value is $1.33 million. Homeowners in the greater San Jose area have an eye-popping $950,271 in home equity, according to the Unison research.

But no place has seen as large of a leap in median home equity as the Phoenix-Mesa-Chandler metro area in Arizona. There, homeowners gained 28.7% or $42,112 in home equity over the last year, as the median home value rose to $336,895.

“Driven by strong housing demand and tight supply, aided by government support and near rock-bottom mortgage interest rates, home prices have not taken a hit during the COVID-19 pandemic,” the report’s author, Winfield Xu, wrote. “As a result, there have not been many notable decreases in home equity values in large metropolitan areas.”

How to Convert Home Equity into Retirement Savings

Home values and home equity have skyrocketed in the last year, according to a report from Unison.

Now, let’s talk about how you can convert all of your home equity into money for retirement. There are a number of ways that you can go about doing this because there isn’t a single method to get equity out of your home. From selling to getting a reverse mortgage, here are the four most popular strategies for tapping your home’s equity:

1. Downsize to a smaller home or a rental

The most obvious option is to sell your home, purchase a smaller one and pocket the difference. Some retirees who downsize forgo buying a new home altogether and opt to rent instead. These retirees are less likely to be interested in building equity in their home over the course of several decades and instead view their home as an expense, not an investment.

2. Cash-Out Refinance

For retirees who don’t want to move, a cash-out refinance may be a viable option. A cash-out refinance is a new loan that replaces your existing mortgage. While other types of refinancing can result in a lower interest rate or change the length of your mortgage, a cash-out refinance leaves you with a new mortgage for an amount that exceeds what you currently owe. You then collect the difference in cash.

While the cash-out refinance will produce a lump sum of tax-free cash, there are risks and drawbacks associated with this type of transaction. In addition to paying closing costs, you also give up the equity you’ve presumably worked to build. And if the value of the home drops, you could end up owing more than the home is worth. Then again, if you’re committed to staying in your home and your retirement income can cover your monthly mortgage payments, a cash-out may be an option for you.

3. Reverse Mortgages

If you’re at least 62 years old, you may qualify for a reverse mortgage. Like a cash-out refinance, a reverse mortgage allows a homeowner to tap the equity in their home to cover expenses or meet income needs in retirement. Unlike a cash-out refinance, though, you can receive the cash in monthly installments, a line of credit or a lump sum payment.

A reverse mortgage loan only needs to be repaid if you pass away or if your home is no longer your primary residence. If you die after taking out a reverse mortgage, your heirs will either need to sell the property or use other funds to repay the loan and maintain ownership of the home.

4. Convert Your Home Into a Rental

Retirees with the energy and willingness to be a landlord can combine some of the above strategies to create a new income stream. If you own your home outright, you can take out a mortgage on the home and use the cash infusion to cover your retirement expenses, including buying a smaller home or renting an apartment. By converting your primary residence into a cash-flowing rental property, you’ll hang on to the home and use the monthly rent to cover your mortgage payments. pocketing whatever’s left over. Assuming the property remains rented, it will be a valuable asset to leave to your heirs as part of your estate.

Bottom Line

Home values and home equity have skyrocketed in the last year, according to a report from Unison.

The massive gains the housing market has made in the last year have homeowners sitting on $22.7 trillion in home equity, according to a report from Unison. If you’re approaching retirement or have already retired, tapping the equity in your home can be a viable way to supplement your retirement income. Downsizing, cash-out refinances and reverse mortgages are all potential ways for you to convert home equity into cash for retirement.

Retirement Planning Tips

  • Retirement is tough, especially if you’re trying to figure it out on your own. Financial advisors can help you create a plan and measure your ability to succeed to that plan so that you have what you need in retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Social Security is an important piece of the retirement planning puzzle for many people. Knowing how much your benefits will be is vital to creating a plan that supports the lifestyle you want to live in retirement. SmartAsset’s free Social Security Calculator can estimate how much your benefits will be based on your age and income.
  • Figuring out how much you’ll need in retirement can be tricky. Using our free retirement calculator can help you find a rough estimate so you can compare and see where you’re on track.Photo credit: © Yalanskyi, ©, ©