Your Home Could Be Worth a Lot. Should You Tap It in Retirement?

Key Takeaways:

• Tapping your home equity can help you supplement your retirement income, but it also puts your home at risk if the payments become unaffordable.
• It can be harder for retirees on a fixed income to qualify for traditional home equity financing options, so reverse mortgages and HEAs can be good alternatives. 
• The right home equity solution depends on your age, income, timeline, and how much you want to preserve for your heirs.

After decades of mortgage payments, many homeowners enter retirement having built substantial equity in their homes. According to the National Council on Aging, the average senior over the age of 65 has over $250,000 in home equity. That’s a significant resource you can use to cover medical expenses or manage living on a fixed income. 

But it can be challenging to figure out which option is the best fit for your lifestyle and financial situation. So before borrowing against your home, it’s important to understand how each option works and the pros and cons of tapping home equity in retirement.

What Does “Tapping Home Equity” Mean in Retirement?

Home equity is the portion of your home’s value that you own outright, and it’s calculated by subtracting your mortgage balance from your home’s current market value. For example, if your home is worth $450,000 and you owe $100,000 on your mortgage, you have $350,000 in equity available.

Retirees often find themselves in a unique position due to years of mortgage payments and rising home values. But while their home equity is often high, many retirees live on a fixed income.

If your goal is to stay in your home without needing to sell or downsize, accessing your equity can make that possible. But it’s important to weigh your options carefully and understand which product is the best fit for your situation. 

Your Options for Accessing Home Equity

There are five main ways you can access your home equity — here’s a side-by-side comparison, followed by a closer look at each. 

Home Equity Loan

A home equity loan gives you a one-time, lump sum payment that’s repaid in fixed monthly installments. Because the loan comes with a fixed interest rate, the monthly payments won’t change, making them easier to budget for. 

Home equity loans work well for one-time expenses, like a roof replacement or paying off higher-interest credit card debt. However, you’re also taking on a new monthly payment, and if you’re unable to manage it, you risk losing your home.

Qualification note: Lenders will consider your debt-to-income (DTI) ratio and credit score when you apply. Fortunately, Social Security, pension income, and regular 401(k) or IRA distributions all count as qualifying income. Some lenders will also “gross up” your non-taxable income by 15–25% to reflect its after-tax value. Because the payment is fixed and the loan is easier to underwrite, home equity loans are easier for retirees to qualify for than HELOCs. 

HELOC (Home Equity Line of Credit)

A HELOC operates more like a credit card than a loan. You’re approved for a maximum credit line and can draw from it on an as-needed basis during the draw period, which typically lasts 10 years, and only have to pay interest on what you actually borrow. Once the draw period ends, repayment begins, and your monthly payments can jump significantly.

The main appeal of HELOCs is their flexibility since they can function as a cash cushion for unexpected expenses, letting you borrow only what you need. This is useful for retirees managing unpredictable costs like healthcare or home maintenance.

Qualification note: HELOCs are some of the hardest products for retirees to qualify for because lenders base eligibility on a homeowner’s ability to repay the loan. Lenders may view retirees as a bigger risk because most have fixed incomes and limited options to increase their earnings. Retirees relying on distributions from retirement accounts may need to show consistent withdrawals or agree to settle for a smaller amount than originally expected.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash. For example, if you owe $100,000 and refinance to $250,000, you’ll walk away with $150,000 in cash and a larger mortgage.

However, this option makes the most sense when interest rates are low. And when you factor in closing costs, the math often doesn’t work unless rates have dropped significantly since you first took out the mortgage.

Qualification note: A cash-out refinance is one of the hardest home equity products for retirees on fixed incomes to qualify for. You’re applying for an entirely new mortgage, which requires full income documentation and a credit review. Lenders can use asset depletion calculations, which are used to convert liquid assets (like retirement accounts) into monthly income to help retired borrowers qualify, but a cash-out refi is still best for borrowers with strong, verifiable income, according to the Federal Reserve.  

Reverse Mortgage

A reverse mortgage lets homeowners 62 and older convert their home equity into cash without making monthly mortgage payments. Instead of you paying the lender, the loan balance grows over time and is repaid when you sell the home, move out permanently, or pass away.

The most common type is the Home Equity Conversion Mortgage (HECM), which is FHA-backed and requires counseling. The funds can be taken as a lump sum, a line of credit, monthly payments, or a combination of all three.

You’ll retain ownership of your home and can stay as long as it remains your primary residence. The trade-off is that the loan balance continues to grow, reducing the equity available to your heirs.

Qualification note: This is one of the most accessible options for retirees since HECMs have no income requirements. You just need to be 62 or older, own the home as your primary residence, and have sufficient equity.

Home Equity Agreement (HEA) / Home Equity Investment (HEI)

A home equity agreement is different from a traditional loan. An investor provides you with a lump sum of cash in exchange for a share of your home’s value when the agreement ends. There are no new monthly payments. 

When you eventually sell or reach the end of the agreement, your investor receives their share of the appreciation based on how the home’s value has changed. If your home goes up significantly in value, the investor benefits. An HEA can be a good choice for retirees who want to access their equity without taking on any new monthly payments. Qualification note: HEAs are typically the easiest product to qualify for since most providers don’t require income verification or a high credit score. Instead, you’ll typically qualify based on how much equity you’ve built in your home. That makes HEAs more accessible for retirees who are asset-rich but living on a tight income.

Pros of Tapping Home Equity in Retirement

If you’re looking for ways to manage your income in retirement, accessing your home equity comes with some real benefits:

• You can stay in your home: Accessing your equity allows you to stay in your home instead of downsizing or selling.
• Supports aging in place: Many retirees use their home equity to fund home modifications that allow them to stay in their home safely as their mobility changes.
• Covers large, one-time expenses: Tapping into your home equity allows you to cover large expenses like healthcare costs or major home renovations without disrupting your monthly budget.
• No monthly payments: Reverse mortgages and HEAs provide access to cash without adding an additional monthly payment, which is useful for anyone on a tight budget. 
• Can reduce higher-cost debt: Using home equity to pay off high-interest credit card debt can significantly reduce the amount of interest you end up paying.

Cons and Risks to Understand

Borrowing against your home equity isn’t a risk-free decision, and there are some trade-offs to consider: 

• Adding debt to a fixed income is risky: Most home equity products require taking on additional monthly payments, which is risky if you’re operating on a tight income. 
• Risk of foreclosure: Home equity loans, HELOCs, and cash-out refinances are all secured by your home, and if you can’t make the payments, you risk losing your house.
• Variable rates create uncertainty: HELOCs come with variable interest rates, and if rates rise, your payments can increase significantly.
• Additional costs: Most home equity products come with additional fees and expenses, which can add up faster than you might think. 
• Reduces future wealth: If you take out an HEA and your home appreciates significantly in value, the investor’s share could be significant. That’s money that would have otherwise belonged to you or your heirs.  

How to Decide Which Option Is Right for You

Before tapping your home equity, here are some questions to consider:

• Can you comfortably handle the monthly payments? If adding another monthly obligation would strain your budget, you may want to consider a home equity product that doesn’t require additional payments. 
• How long do you plan to stay in your home? Home equity products tend to make the most sense for people who plan to stay in their homes long-term.
• Do you want to preserve equity for your heirs? If leaving your home to your children is important to you, consider how each product could affect your future equity.
• Are you 62 or older? Reverse mortgages are only available to homeowners 62 and older.

When Tapping Home Equity Makes Sense — and When It Doesn’t

There are situations where accessing home equity can make sense financially, and situations where it could create more problems than it would solve. Here’s how you can determine whether or not it’s the right choice for you. 

It may make sense if you’re planning to:

• Fund major healthcare expenses
• Pay for essential home repairs
• Make aging-in-place modifications
• Create a temporary cash cushion
• Consolidate high-interest debt

It may not make sense if you’re planning to:

• Fund discretionary lifestyle spending
• Cover chronic budget shortfalls
• Repeatedly borrow to pay everyday bills
• Avoid necessary retirement planning adjustments

Conclusion

Your home equity can be a valuable resource in retirement, but the right strategy depends on your income, age, and timeline. For retirees with reliable income and strong credit, a home equity loan or HELOC can provide flexibility and predictable access to cash. And for retirees who want to avoid monthly payments, a home equity agreement like those offered by Unlock may be worth exploring.