Author Topic: Cashing in home equity when it reaches 1 million  (Read 1637 times)

LanzWiler

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Cashing in home equity when it reaches 1 million
« on: June 17, 2023, 04:57:37 PM »
We owe 358,000 on a loan for a house that is currently worth 628,000. We just started dumping money into a VTSAX and are currently saving about 60,000 a year. We think if we can keep up the savings rate we can retire in 10 years. Money mustache says if you have a $1 million house, you can cash that in dump it into a VTSAX and boom you’re retired. With selling our house when it reaches $1 million in equity be a good idea? We would then have to rent or buy another house to live in? It’s an interesting idea, I’d love to hear weigh in. That would be a great way for us to not stress about that savings rate. And potentially shorten our 10 years to FIRE if the house continues to appreciate which I expect it will.

RWD

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Re: Cashing in home equity when it reaches 1 million
« Reply #1 on: June 17, 2023, 06:49:19 PM »
What post are you referencing? I can think of ways this could work but there are tons of caveats...

LanzWiler

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Re: Cashing in home equity when it reaches 1 million
« Reply #2 on: June 17, 2023, 06:56:41 PM »
 How to Retire Forever on a Fixed Chunk of Money “Heck, even if you are stuck with a $1 million house occupying a huge part of your net worth, you can convert that into livable money: sell the house, put the cash into index funds, and use the resulting cash stream to rent a spiffy but reasonably priced house or apartment in the lovely walkable area of your choice.”

RWD

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Re: Cashing in home equity when it reaches 1 million
« Reply #3 on: June 17, 2023, 07:38:13 PM »
Okay, found it. Link for anyone else:
https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/

Okay, first thing worth pointing out is inflation. That blog post was written in 2018, so the equivalent would be $1.2M house equity now. And your target will always be increasing as inflation increases. So you can't just set a target magic number and wait until you hit it. Of course, you have the same moving target issue with any investment portfolio.

The wording in that specific part of the post is about how to unlock equity if you find yourself stuck. It's not an endorsement of deliberately trying to stuff $1M in equity in your house then pull the ripcord. There's no special strategy to steer towards here. All the ways you can build more home equity come at the expense of the rest of your financial picture. Either you have too expensive of a house or you are foregoing other investments to pay down the mortgage faster. Hint: your house will appreciate (or not) regardless of your mortgage balance (that's the power of leverage) so focus on other investments instead of paying extra on your mortgage.

Whether it's a good idea to sell your house to fund your retirement depends on your goals. If you would prefer to downsize somewhere else then it's a great idea. If the house you have is already your ideal lifestyle then it doesn't make sense to sell it. There is also the potential middle ground of taking out a HELOC if you build up too much equity, assuming interest rates are favorable.

LanzWiler

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Re: Cashing in home equity when it reaches 1 million
« Reply #4 on: June 17, 2023, 08:29:23 PM »
No, definitely not looking to actively cram equity. I’m thinking, that if we plug away with our regular savings rate and fine at the end of seven years, that to sell our house and cash out puts us at our goal for financial independence, selling might be a good idea. But that puts us out of homeownership and into a rental market, or possibly a move to a lower cost of living area and I’m wondering what others have done in a similar scenario.

lhamo

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Re: Cashing in home equity when it reaches 1 million
« Reply #5 on: June 17, 2023, 09:02:55 PM »
If you are hoping to stay in the same area this doesn't really work unless you can time the sale/move to coincide with downsizing or relocating to some place comparatively less expensive in the same general metro area.  So if you are FIRE-ing and can move from an expensive closer in house to something cheaper out in a suburb or satellite town, and/or your kids are launching and you can shift from a larger family home to something just for the parents.

Here in the greater Seattle area, we could probably downsize from our current home to something slightly smaller/in a different location but still in our current zip code and free up something in the order of 400-500k in equity.  Could free up more than that if we were willing to move to a condo or go further north or south.  One of our kids is more or less fully launched (in grad school hundreds of miles away) and the other is about to head off to college (will be local but staying in the dorms), so we could make do with a 2 br if we needed to. 

Paper Chaser

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Re: Cashing in home equity when it reaches 1 million
« Reply #6 on: June 20, 2023, 03:08:55 AM »
I'd think that the stability and predictability of a mortgage payment would have significant benefit for retirees vs the uncertain expenses of rent.

Everybody focuses on the 'stash', but how do you know how large the stash should be if your monthly expenses are variable and heavily dependent on things out of your control? Life has enough variables to account for in a retirement that hopefully lasts decades. I want to control what I can control and minimize the number of potential variables as much as possible, so a steady housing cost is a big part of that.

Metalcat

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Re: Cashing in home equity when it reaches 1 million
« Reply #7 on: June 20, 2023, 06:07:08 AM »
It's not a good idea or a bad idea, that blog post is designed to get you to think about it.

It's the same way Pete wrote a lot about relocating to an LCOL location. It's not the best option for everyone, but it's absolutely worth thinking about.

The whole point is not to be passive in your decisions. If you live in an HCOL location, you should be constantly assessing if the trade offs are still worth it. If your house that you bought for a reasonable price is now worth over a million, you should assess if the house is worth trying up that equity.

The point isn't that you should sell a house when it's worth 1M, the point is that your plans should evolve and adapt to changing realities.

So if someone is living in a certain area for work and their house had appreciated enormously in value, and they don't like their job, then it might be perfect to sell the house, relocate to a place with cheaper housing, and retire.

That may be an awesome option, or it may be a TERRIBLE option. It depends on what the benefits of staying in that house are vs leaving.

If they have 3 kids, one special needs, enormous local family support and specialist medical care, and their house is in a specific location that has actually appreciated less than other houses in their region, and downsizing isn't an option because their home is actually a townhouse.

Then no, cashing out for them would make absolutely no sense. It would be a bad trade.

Why do you live where you live? Would retiring change where you would want to live? Is downsizing a desirable option?

These are questions everyone should be asking themselves at some point. The 1M house example from MMM is just a thought exercise to get you thinking more and making decisions in a less automatic way based on past decision-making parameters.

Cassie

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Re: Cashing in home equity when it reaches 1 million
« Reply #8 on: June 20, 2023, 08:33:20 AM »
Is your house close to work? Do you want to remain in the local area once retired? Is the house too big or going to be once the kids are launched? These are all questions to ask yourself in order to make an informed decision.

LanzWiler

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Re: Cashing in home equity when it reaches 1 million
« Reply #9 on: June 21, 2023, 07:47:35 AM »
I sold my paid off house in a HCOL area and rented for awhile. I was already FIREd but didn't have a huge FIRE income.I had a few difficulties I didn't expect. One being unable to qualify for a rental due to not having a job because of RE (and being fairly young when I quit working and single so landlords questioning where I would be getting money from)  and, while having a sizable stash, not having the required 3 - 4 times the rental amount in income (say I want to rent a $2000/month apt (which is the price of a studio here) I need to have $6000 to $8000/month income). 

The most recent has been getting booted out of a rental house when the owners sold and new owners said they wanted to live there. And of course the rapid increases in rents that have been higher than inflation in my HCOL area. All of those reasons and more make me feel.very insecure with renting long term.

So I recently took about 1/3 of my house equity and bought (paid cash) another place relatively close to where I had been living but much lower cost. So if /when you quit working that may be a better option for you if you already own near your jobs. Or if selling now would make you instantly FI and able to RE and live wherever you want, then selling and renting for awhile before rebutting might make better sense. All of this is dependant on the size and type of housing you need (just need to rent a room? A big house? Etc) and what your long term plans and needs will be.
That’s a really helpful insight. I didn’t consider the rental requirements. I do have way more house than we will need when we FIRE and we are happy to relocate in a LCOL area so it seems like a viable option but maybe buying cash would be the best way to create a more long time sustainable path. Perhaps somewhere tropical….:D