Tapping Your Home Equity When You’re Retired

Key Takeaways

• Retirees can tap equity using a loan, line of credit, reverse mortgage, cash-out refinance, or home equity agreement.
• The right choice depends on your financial situation and goals.
• Before committing to a home equity product, make sure you understand the costs and requirements, as rates and fees vary by lender.
• You’ll usually be able to stay in the home and keep your name on the title, regardless of the method you choose.

The average homeowner over age 65 is sitting on more than $250,000 in home equity. But until you sell your home, that money is out of reach – unless you decide to tap your equity.  There are several methods you can use. Each option has its pros and cons, so we’ll break them down for you below.

Using home equity in retirement

Tapping your home’s equity gives you access to the cash you need for daily expenses and big purchases. Some of the uses for home equity in retirement include:

• Supplementing retirement income
• Paying medical bills not covered by insurance or Medicare
• Financing home improvements, including modifications that will help you age in place
• Consolidating debt

Understanding Your Home Equity Options

Home Equity Line of Credit (HELOC)

HELOCs offer a revolving line of credit with a draw period and a repayment period. You can borrow what you need (up to a set amount) during the draw period and replenish your credit by paying back what you’ve borrowed. After the draw period, the repayment period begins. During this time, you repay what you’ve borrowed with interest. Rates for HELOCs are often variable, so your payment may rise depending on market conditions.

Pros

• Rates for a HELOC are usually lower than for personal loans or credit cards
• You can draw funds as needed and pay them back, like a credit card

Cons

• Variable rates mean payments are variable, too
• If you have an existing mortgage, your HELOC amount may be limited
• Income requirements could make it difficult to qualify

Home Equity Loan (Second Mortgage)

Although they sound similar, a home equity is different from a home equity line of credit. With a home equity loan, you’ll usually receive the loan proceeds as a lump sum. You’ll then repay the loan in fixed installments. You can choose a repayment period between five and 30 years. Home equity loans are considered a second mortgage.

Pros

• Predictable payments
• No closing costs

Cons

• Usually requires a credit score of 620 (680 to be eligible for a preferred rate
• Loan is limited to 80% of your equity; an existing mortgage can decrease the equity available to borrow against

Cash-Out Refinance

A cash-out refinance is an all-new mortgage that replaces your existing mortgage. You borrow more than what you need to pay off the old mortgage, receiving the excess funds as a lump sum. Then you repay the new mortgage as usual, while using the cash for emergencies, debt consolidation, or other expenses. Since a cash-out refinance is a new mortgage, you’ll have to pay closing costs, too.

Pros

• Take up to 30 years to repay
• Lump sum isn’t taxed, and you may qualify for a tax deduction if you use the funds for substantial home improvements

Cons

• Closing costs can be expensive
• You’ll give up the rate you had on your original mortgage for today’s market rates

Reverse Mortgage

With a reverse mortgage, the lender pays you. You still get to stay in the home, and the title remains in your name. Interest grows on your balance each month until you pay off the loan all at once, usually when you sell the home. You still need to keep up with maintenance and taxes in the meantime.

Pros

• Continue living in your home
• No monthly loan payments

Cons

• Interest and fees add up over time.
• The loan typically must be repaid in full if you sell or move
• Strict primary residency requirements. The reverse mortgage could come due if you are away from your property for more than six months for a non-medical reason or for more than 12 consecutive months for a medical reason.

Home equity agreement

Home equity agreements (also called home equity sharing or home equity investments) are another option for seniors. These products aren’t loans, so they don’t carry any monthly payments or interest charges. That can be appealing to retirees on a fixed income. Unlike loans, home equity agreements have flexible requirements for income, credit score, and debt-to-income ratio.

Pros

• No monthly loan payments or interest
• Flexible qualifying requirements

Cons

• Lowers your total equity in the home
• Not available in every sta

Choosing the Best Option

As a retiree, choosing the solution that will fit you best will depend on a few different factors. The following questions will help you decide:

• What products are you eligible for? You’ll need to know your credit score, current equity, income and monthly debts. Your age may be a factor, too – reverse mortgages require you to be 62 or older, for example.
• How much money do you need? With most home equity options, you’ll be restricted to a fraction of your total equity. Look for the product that will help you access the amount you need.
• How will your choice affect your estate planning? With a reverse mortgage, for example, the loan is repaid by selling the home. If you were planning to leave that property to your heirs, a reverse mortgage might not be the right choice.
• What are the tax implications? Although equity isn’t typically considered taxable income, there may be other factors to consider. Talk to your tax advisor to make sure you won’t experience any surprise tax consequences.
• How much are you willing to pay? Different home equity products have different interest rates and fees. Make sure you understand the total cost of borrowing or sharing your home’s equity before you decide.
• Are you willing to risk your home? Using your home as collateral on a loan puts you at risk of losing your home if you default. Make sure you can afford to repay what you borrow, keep up with maintenance, and make your tax payments before you commit.
• Do you receive government benefits? If you’re over 65, accessing your home equity typically shouldn’t affect benefits like Social Security if you’re living in the home. However, you should discuss your situation with a representative or advisor to make sure.

Using the equity you’ve built can make it easier to manage your expenses when you’re retired, especially when you’re on a fixed income. Explore your options for tapping into your home equity and consider an Unlock home equity agreement for a loan-free alternative without monthly payments or interest.