Owning a home should significantly increase your financial net worth, which is the difference between your assets, including bank accounts, retirement accounts, stocks, bonds and mutual funds, and your liabilities or debts. You might think that it's counterintuitive: having a mortgage, or a debt, should not make you more financially solvent. But it does. In general, any home you own will increase in value, or appreciate, over the decades while you pay down the mortgage debt you used to buy the home.
Even if you don't notice much appreciation in your home, due to forced savings caused by paying down the balance on your mortgage, you will still significantly increase your net worth. In other words, the more you pay down your mortgage, the less debt you have, and the more equity you have in your house. Equity is the difference between the market value of a home and the outstanding loan on a home.
Many retirees can tell you that owning a home free and clear of a mortgage is a joy in and of itself. Not only does owning a home save you money on inflation, the equity you gain by owning a home provides you with a supplement to other sources of retirement income.
Using Your Equity
If you're not familiar with how using equity works, allow us to explain some of the ways in which you can tap into the value of your home:
1. Some people chose to "trade down." Trading down is when you move into a less expensive home on or after retirement. For example, if you own a home that sells at $250,000 and purchase a home that costs $150,000, you've just freed up $100,000 in cash. Although you are subject to certain requirements, you can realize up to $250,000 in tax-free profits if you're single, and up to $500,000 if you're married.
2. Another way you can use your home's equity is by borrowing money against it. So, if you find yourself in a tight spot financially, you can borrow against your equity, providing you with a low-cost source of cash. The best thing about tapping into your equity this way is that the interest you pay is generally tax-deductible.
3. Still another way you can use your equity to your advantage is by taking out what is known as a "reverse mortgage." In this situation, your lender will send you a monthly check to spend any way you want. In the meantime, a debt balance is built up against the property, and will be paid off when the property is eventually sold.
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