Five Options for Unlocking Equity

Part Two in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.

Smart Home Equity Options
Double and triple check your scenarios with a financial planner whose fiduciary duty is to you!

Homeownership plays vital role in lifelong wealth-building.

You need a roof over your head.

You can rent.

Renting doesn’t build any equity for you.

Indeed, the element of the “forced” savings inherent in paying down a mortgage may, in fact, create positive inertia that helps make homeowners more disciplined savers than they might otherwise be. 

Point Four.

The net worth of homeowners versus renters is not even close.

They are far wealthier than renters

… by multiples of 8 or more — regardless of age, income level or race.

Many Baby Boomers and home-owning empty nesters may be fortunate enough to retire with “substantially appreciated home equity.”

Bull Market

Was it because they bought in the right place at the right time in terms of a particular local real estate market?

Or, as a result of a long-term real estate bull market.

In either case, if Boomers and other empty nesters can command the emotional wherewithal to use their home equity, there are a wide variety of tactics to produce additional retirement income –

  • Downsizing,
  • Renting or
  • Leasing.

The Fidelity Research Institute evaluated several scenarios in depth.

  • Three involve leaving and moving to a less expensive residence.
  • Two examine how to remain in their home while “unlocking” equity for retirement income.

The Institute lays out a range of financial and emotional “pros” and “cons.”

Then, like your financial planner, Fidelity examines financial models for a clear after-tax view of each option.

NOTE: – Double and triple check your scenarios with a financial planner whose fiduciary duty is to you!

Not to the products they sell or the commissions they make.

  • Across all five scenarios, your heirs inherit less.
  • An increase in cash flow comes only at the expense of the amount left to heirs.
  • Get out your spreadsheets and calculators.

The following assumptions were made during the modeling of the scenarios:

The future inflation rate is 2.47%.

The future home appreciation rate is 4.0%; this is 1.5% over the rate of inflation (which is the rate at which wages outpace inflation). 

Salary and Job Growth Fluctuations

Data collected from the Social Security Administration and the Department of Labor indicate a long-term real salary growth rate of about 1.5%. 

We assume that house price appreciation will remain in line with expected salary growth. 

Thus, everything else held constant, housing expenses remain the same percentage of income over time.

The rate of return for an inflation-adjusted lifetime annuity is 5.25%. 

This annuity assumes a 10-year guarantee period. Annuity payments are taxed based on the constant exclusion ratio applicable under current law.

And, Fidelity estimated annual home expenses at the following percentages of the home’s value:

  • Property tax – 1%
  • Maintenance – .50%
  • Insurance – .15%

A decade passed.

So, if you are considering one or more of these scenarios, update these assumptions with current rates.

Home sales.

Home Sale Assumptions

Net proceeds on home sale are assumed to be tax-free because length of residence and other requirements were met.

Home sale transaction costs are 5% – Source: WSJ article “Forget the

Mansion”, 8/23/06.

Home purchase transaction costs are 1% – Bankrate Mortgage Closing Costs, 8/10/06.


The price-to-rent ratio (the property’s price divided by the annual rent) is 17.1 on a national basis — Source: Moody’s, as quoted in the New York Times on 5/27/05.

Rent rises at the home appreciation rate.

  • Two couples, one in their early 60’s and the other roughly 15 years older.
  • Both living into their mid-90’s.

The Smiths are 62 and the Walkers are 75; we use a planning age of 94 for both couples.

Both couples have a spending level of $80,000. 

Same tax bracket.

Tax Brackets

We assume they are in the 25% marginal federal income tax bracket and have enough deductions to itemize – with more than $12,300 of tax deductions, so that their qualified home mortgage interest will be an itemized deduction for them. 

$400,000 to $300,00.

The original home is worth $400,000 with no outstanding debt, and the smaller home that they will rent or buy is worth $300,000.

$80,000 to spend.

Property tax, maintenance and insurance on the original home are assumed as part of the base case and are covered out of the $80,000 in spending.

Cash flow now and then.

Average annual incremental cash flow is in current dollars — in some cases, smoothing of uneven cash flows was done to arrive at an average annual incremental cash flow value.

Total incremental cash flow is in current dollars.

Amount to heirs (real estate or money) is in future year dollars.

PV of cash and inheritance is in current dollars, using the 5.25% annuity rate as the discount rate.

We will look at their financial outcomes in using home equity over a 32-year planning horizon to age 94.

NOTE: – Double and triple check your scenarios with a financial planner whose fiduciary duty is to you!

An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.


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