Home economics: Do you cash out?

When their son was born six years ago, Dan and Geri Burke moved to East Hampton, N.Y., to be near her family. But the couple found they were seeing less of each other because of Dan's long commute and work-related travel. Their solution?

The Burkes discovered that the ticket to the life they wanted was not only within reach, but that they were living in it. The home they had built for $400,000 is currently valued at approximately $1.5 million. So, after talking to a financial planner, they've decided to sell their home in New York.

"The proceeds will allow us to pay off our mortgage, save for retirement and our son's college tuition, and buy a new home in Florida," says Ms. Burke, who is now house-hunting in Tampa. "Let's face it, chances are housing prices will go up more there [East Hampton] than here [Tampa], but the whole decision to do this is quality of life for my family."

It's a question that homeowners are asking with increasing interest as housing values rise, especially in the West and Northeast. With the chance to make a handsome profit on your home, does it make sense to cash out and move somewhere cheaper? The answer depends on more factors than money, financial planners say, including how you're going to use the proceeds.

"I generally see people in their 50s to early 60s. They start thinking about their retirement," says Nan Sabel, the certified financial planner in Bedford, Mass., who advised the Burkes. "It's another piece. They have Social Security, maybe a pension, but by downsizing they just added another big chunk to their retirement security."

Downsizing isn't the only option, according to Ms. Sabel, who says that some people are able to maximize their housing potential by moving to a place where housing prices are lower. But if the decision involves moving to another part of the country, you have to look at not just the cost of living, but wage potential if employment is part of your future. "It only makes sense if you are going to be able to put a big chunk away for your retirement," says Sabel.

For Alice Micklewright, a San Francisco real estate agent, the decision did come down to money. The $160,000 home that she bought 20 years ago, a single family with a small rental unit, is now worth between $1.4 million to $1.5 million. She and her husband recently purchased a smaller home in Sonoma, Calif., 35 miles away. They plan to rent the Sonoma property out temporarily, then move into it after selling their current home. With the proceeds, she says, they will be able to pay off both properties and have enough money left over for retirement.

"Our attachment to the house is a big consideration," Ms. Micklewright says. "Our son lives in the city. If we could work out retirement in a different way, we would like to stay."

Liquidating is a good decision "if you can detach yourself emotionally," says Kevin Daum of Stratford Financial Services in nearby Alameda, Calif. "In California, we see people every few years taking the money." Houses in the Bay Area have been appreciating as much as 20 percent a year, he points out.

On a regional level, resale prices in the fourth quarter of 2004 increased 14.1 percent in the West from a year earlier, according to research conducted by the National Association of Realtors. In the Northeast, prices rose 13.5 percent during the same period. In the South, values rose 8.0 percent and in the Midwest, 6.9 percent.

Timing matters greatly.

When Barbara Mank, a writer working on her first novel, sold her home in Wellesley Hills, Mass., 13 years ago, it changed her life. The house had seen her through a marriage and divorce and the raising of her two children.

"The market had already started to heat up," she recalls. "The house had already increased several times. It was a good time, but where would I go?" Unsure of where she ultimately wanted to live, she rented a condo in Boston. A year later, she bought a condo in the same building she had been renting.

Of course, had she held onto the Wellesley house, she could have netted much more money. But Ms. Mank acknowledges no regrets. "With investments made from the sale of the house, I am able to live a decent life and I expect to continue to do so," she says.

With the exception of downsizing for retirement, personal-finance experts disagree about whether cashing out of one's home makes sense.

"The issue isn't downsizing, but getting the money out of the house," says Mr. Daum. "Most people think, 'Pay off your house, pay off your house,' but that's the worst thing you can do economically.... Anybody who has more equity in their home than liquidity should be assessing their mortgage and equity in context of their whole financial structure - investment strategy, tax strategy, diversification strategy - and err on the side of liquidity."

Among the advantages, he points out, are laws that let homeowners earn up to $250,000 in capital gains ($500,000 for couples) on the sale of their home without paying any taxes.

But too often, homeowners cash out and do the wrong thing with the proceeds, says Lois Vitt, founder of the nonprofit Institute for Socio-Financial Studies in Middleburg, Va. "Don't use it to pay off short-term debts. So many people pay off credit cards and then run them up again. Home equity can anchor a person's financial security if you protect it and don't squander it."

When Dr. Vitt and her husband recently sold their large home in Rectortown, Va., they renovated a smaller rental property in nearby Middleburg to better suit their lifestyle. "The [old] house was beautiful and historic. We loved it and cared for it, but it was time to move into something smaller," she says. "We had built up equity and wanted to take advantage of this economy - it's not going to be here forever."

Vitt firmly believes in having a home fully paid for as one approaches retirement age. "Why not have a smaller home that's more reflective of how you live? Some people can own a smaller house free and clear," she says. "If you don't have to worry about your home, everything else will fall into place."

But sometimes, the financial incentives, no matter how lucrative, just don't compare to one's reality and lifestyle. Jan Cannon, a career counselor who works from home, has owned her house in Belmont, Mass. since 1975. "Since then my husband died. I have two children who are grown but not yet settled."

Two years ago, Ms. Cannon considered selling. She did find a property, but changed her mind before sealing the deal.

This past winter, Cannon broke her foot and thought perhaps it was the time to simplify her life, so she started looking around again.

"I started to figure out the financial aspect," says Cannon, whose home has gone up in value over nine times since she bought it 30 years ago.

But when she took into account the extra costs involved - leasing office space and storage space for the belongings her children aren't yet ready to take, for example - she decided to stay put.

"In a sense I'm ready for something different," says Cannon. But as of yet, she feels the pull of the lifestyle and career that she has in her current location stronger than the financial benefit to be gained by selling her home.

"Check with me next year," she says. "Every winter I think about this."