For Retirees, a Home Could Be Your Largest Asset—or Your Biggest Liability

If you're a homeowner about to retire, you've probably worked most of your adult life to pay off the home, while dreaming of the day when you could kick back and live a mortgage-free life while enjoying the fruits of your labor. But could generations of conventional wisdom be wrong? It turns out, if you're a retiree, a home could either be your largest asset—or your biggest liability.

Here's what you need to know to determine which side of the ledger your house is on.

Signs Your Home Is Your Largest Asset

As a general rule, homeownership is considered a smart investment for several reasons. "Your home can be one of your biggest assets because of the equity that's been built up over the years," says Dennis Hsii, co-founder of Highland Premiere Real Estate in Los Angeles, Calif. "You'll be able to pass it on to your heirs, and they get a step-up in cost basis to the current market value." And if you use this strategy, Hsii says it can significantly reduce capital gains taxes if the home is later sold by your heirs.

In fact, according to Jason Gelios, a realtor at Community Choice Realty in Detroit, Mich., real estate is one of the best ways to build wealth in America. "A home is deemed an asset because it could provide future economic benefits to the owner in the form of built-up equity that has accrued over the years of ownership," Gelios explains.

And with that equity, he explains that you can take money out of the house in the form of a Home Equity Line. "And for those 62 or older with a substantial amount of equity in their home, it can be used as collateral for what is called a reverse mortgage—which could pay them back money every month to assist with expenses," Gelios adds.

Signs Your Home Is Your Biggest Liability

However, a home isn't always an asset, especially for retirees. "It becomes a liability when it is worth considerably less than you paid for it, especially if you have a mortgage," warns Christopher Totaro, an agent at Warburg Realty in New York, N.Y. "The last thing a person wants to have happen, when they are retiring, is to be saddled with a debt that has no equity."

As a general rule, homes tend to be worth more as time passes. However, if you purchased a home in what is now considered a less-than-desirable neighborhood, you may not have as much equity. "You should also be aware of where we are in the housing market cycle," says Dennis Hsii. "During a down market, the value of your home will drop and it could take a long time to climb back up."

There's another way that your home could be considered a liability. "If it falls under the category of an expense that you have to manage," Gelios explains. "And these expenses could be a mortgage, homeowner's insurance, municipal taxes, repair or renovation costs, and any other required expense such as homeowner's association fees—these costs can weigh heavy if you face hard times."

Hsii agrees, noting that significant costs can add up quickly for retirees. "In that situation, you run the risk of spreading yourself too thin if the roof, pipes, or electrical needs to be replaced," he warns.

Homeownership Advice for Retirees

So how can you decide if you need to stay in your home, or try to sell it? "My advice is to take a holistic approach to what you want in your retirement years: How much importance do you place on your living space?" advises Hsii. He says the answer to this question is at the center of deciding if you need to downsize. "Be mindful of your lifestyle and take into account how close you live to your family, property taxes, maintenance and repair costs, as well as your financial health."

If you decide to sell your home and downsize to something that costs less, Gelios says this will allow you to save part of the proceeds from the home's sale. "Retirees with a substantial amount of equity could use that money to fund other endeavors such as traveling, cost of living, or any other passion project they may want to do in their retirement years."

Homes have a sentimental factor, but pushing past those emotions can help you be more objective in evaluating your home as an asset or a liability. According to Melissa Cohn, an executive mortgage banker at William Raveis Mortgage in New York, N.Y., retirement-aged homeowners generally choose one of these options: "Plan to pay off your mortgage before your target retirement date; obtain a reverse mortgage that pays out over a specified time period; rent out your home to achieve cashflow or offset a monthly cash flow deficit if you have a mortgage, and selling the home in the future makes better financial sense."

However, Ellen I. Sykes, a broker for Warburg Realty in New York, N.Y., is not a fan of reverse mortgages. "I've had two clients who got a reverse mortgage, spent the money, and had so little equity that at the end of the mortgage they either were left up the creek or with so little equity their options were limited," she says. "In the case of one client who had a reverse mortgage, they had a time limit in which to sell the house, find a new place to live, and get rid of everything they had accumulated for 40 years. The pressure was enormous."

But if you do decide to stay in your home, Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding in Melville, N.Y., says there are several ways to monetize home equity in retirement. "These could include needs-based government programs like property tax abatements or home improvement forgivable grant programs," he explains. As alternatives to a reverse mortgage, you could tap into loan products such as a home equity line of credit or a conventional mortgage loan.