How a HELOC Can Help You Stay at Home for as Long as Possible in Retirement
Taking out a loan as a senior may seem counter-intuitive, but there are reasons to consider it. Getting a home equity loan or line of credit (HELOC) as an older homeowner can bolster your retirement income, provide opportunities for additional income streams, increase the value of your home or help add comfort as you age in place. Read on to understand why HELOCs and home equity loans for senior citizens may be a good idea.
Can a senior citizen get a home equity loan?
Lenders cannot discriminate based on age, so getting a home equity loan is available to anyone who owns a property they are willing to put up as collateral and meets lender requirements.
Unlike other forms of credit, lenders determine your eligibility for a home equity loan or a HELOC based primarily on your home equity. Lenders also consider factors such as your income, work history and credit score, but the value of your home is their primary concern.
You may wonder: How much equity do I have in my home? The formula to determine this is straightforward. Subtract the outstanding mortgage balance (if you have more than one loan, subtract all the balances owed) from the current market value of your home. The result is how much equity you own and the amount you can leverage for credit from a home equity loan or HELOC.
Uncovering the major benefits of HELOCs and home equity loans for seniors
Traditionally, entering retirement debt free is considered ideal, but there are benefits to having a HELOC or home equity loan. Two common reasons for seniors to consider putting their house up as collateral for a loan are to install safety features in their homes and to supplement their retirement income.
Getting access to funds to install safety features in your home
While it isn’t the most splashy investment and may not add value to your home like a remodeled kitchen, it’s important to consider your needs, safety and comfort. Adding things like safety rails or snow-melting mats can help prevent accidents and misfortune down the road.
Some home safety features that may assist seniors include:
- Better lighting
- Larger digital displays for thermostats
- Personal emergency response systems
- Grab rails
- Stairlifts
- Comfortable seating
- Pull down shelves
- Automatic shut-off devices
Supplementing your retirement income
If you have any retirement accounts, such as a 401(k), taking out large distributions means getting taxed in your current tax bracket. A home equity loan or HELOC can supplement your retirement income and help you save on taxes. It also allows you to keep more money in your 401(k), which can continue to earn compound interest and accumulate wealth.
Because you can draw from HELOCs as needed, you can take out only the additional funds necessary to support your retirement income while limiting the amount of debt you accumulate over time. It’s also important to know that some types of interest payments are tax deductible, which can be an additional benefit.
How to use home equity in retirement
The two most common forms of accessing equity are HELOCs and home equity loans. These forms of funding can be used in multiple ways and can help you cover your essential expenses, start home improvement projects and modifications, pay off high-interest debt, invest in income-generating opportunities or fund your travel and leisure activities.
Use the funds to cover your essential expenses
You can use a home equity loan or a HELOC to cover the costs of your essential expenses. For example, if you’ve invested your savings and the market is down, drawing from your savings could be a bad idea. Waiting for the market to rise would mean your portfolio increases in value, and you can get more out of your savings.
Waiting out the market is ideal but challenging if you don’t have enough financing to get you through that time. Utilizing a HELOC or home equity loan to cover your living expenses during that period is an option. When the value of your portfolio increases, you can use that money to repay the loan or line of credit.
Start home improvement projects and modifications
A popular use for a HELOC or home equity loan for seniors is putting the funds toward home improvement projects and modifications. Home remodeling/improvement projects can be a good use of funds because not only will they add comfort and convenience to your life, but they will also increase the value of your home.
Some popular home renovations include:
- Remodeling the kitchen
- Adding a bedroom
- Converting the basement or attic into a living area
- Upgrading the bathrooms
- Building a deck or gazebo
- Adding a swimming pool
Some additions can increase the price and demand for your home. For example, adding a closet to an existing room in your house will allow you to list your home as having an additional bedroom, raising your home’s value.
Pay off high-interest debt
HELOCs generally have an interest rate lower than those of credit cards and personal loans. Because of this, you can use your HELOC to pay off existing debts that have higher rates and consolidate them all into one place. Your repayments will now be toward your HELOC, but you can get out of debt faster because you’ll pay the same amount of debt with a lower interest rate.
Invest in income-generating opportunities
Your home equity loan or HELOC can immediately put a large amount of available funds at your disposal. You may not need these funds to pay off debt or any necessary expenses, but they can be useful for generating more income.
Finding income-generating opportunities to invest in can set up sources of steady income that will remain profitable long after you pay back your loan or line of credit. If you put your financing toward buying investment properties and turn it into a rental property, it can pay itself off and continue to make money for you.
Investing in or starting a business can also lead to long-term profits. Some businesses, like vending machine businesses, provide semi-passive incomes. They require an upfront investment of machines and products to sell, but once the machines are in place, they don’t require much besides restocking and cash collection.
Fund your travel and leisure activities
While you should be careful not to use your HELOC on unnecessary expenses, you can put some funds toward activities you enjoy. Using your line of credit or loan to fund your next trip or dance class is possible, but make sure you do it carefully. If you have the money to pay off your debts at a later date, this may be easier to justify. However, booking a trip for your enjoyment that will be difficult to pay back at the risk of losing your home should not be done.
Because a HELOC is different from a loan, you can only take out what you need for a trip to Paris or a week-long boat cruise and pay back that portion when you can. Conversely, some home equity loans may have prepayment penalties that will charge you for paying your loan back before a certain amount of time has passed. Because of this, using a loan for a trip or leisure activity may not be a good option if you plan to pay back your debt quickly.
What are the best home equity loans for seniors?
The loan terms and pricing of HELOC and home equity loan options vary by lender. To determine the best home equity loans for your financial situation, you’ll need to conduct research by looking at the websites of and contacting multiple lenders. It's helpful to create a spreadsheet that includes the terms, amounts, interest rates and fees like prepayment penalties and closing costs associated with each lender. You can use this spreadsheet to find the right form of financing for you.
Does home equity count as retirement savings?
Home equity shouldn’t count as your retirement savings, but it can be a useful tool to bolster your savings when withdrawing funds from a retirement account such as a 401(k) isn’t ideal. A home equity loan or HELOC has to be paid back; defaulting on your debt means losing your home. Because of this, you must plan on having enough money to pay the debt while ensuring your retirement savings.
Best practices when applying for a HELOC or home equity loan for seniors
Before taking out a HELOC or home equity loan, you should learn and review some of the best practices to get the most out of the financing before filling out a home equity loan application. Understanding the repayment term, applying before you retire and spending your home equity funds wisely are essential to consider.
Understand repayment terms
Every lender has different terms and pricing for their financial products. Before agreeing to anything, ensure you understand what the lender expects of you. In most cases, HELOCs have a draw period where you can access the available funds. After the draw period finishes, there will be a repayment period where you must pay down your remaining debt and can no longer draw from your line of credit. Repayment periods can range from 10 to 20 years. Most HELOCs also have variable interest rates that change with the market.
If you have a home equity loan, you will make monthly payments from the time you receive funding. While this is straightforward, having a clear idea of any additional fees or penalties is essential. Unlike HELOCs, home equity loans usually have a fixed interest rate that doesn’t change over the course of your repayments.
Apply before you leave the workplace
While the amount of your home equity is the most important aspect of securing a home equity loan or HELOC, lenders will also consider other factors to determine your ability to repay your debts.
One factor is your debt-to-income ratio. The lender will determine your ratio by adding all of your monthly debt payments and dividing that number by your gross monthly income. The result will come in the form of a percentage. The lower your ratio, the less risk you are to a lender.
Applying for a home equity loan or HELOC before you retire from the workplace will show the lender that you still have an income, lowering your debt-to-income ratio and making you look like much less of a risk to lenders. As a result, you may receive much better terms and pricing for your funding, even if you decide to retire shortly after receiving the credit.
Spend your home equity funds wisely
Putting a lot of thought into how you will spend the funds from your HELOC or home equity loan is vital to maintaining your financial future. Overspending or making unneeded purchases can be disastrous if you cannot repay your debt later. The best use for your funding should be toward necessities or opportunities that can lead to growing your wealth down the road.
Summary of Money’s home equity loan for senior citizens
There are many reasons you may want to get a home equity loan or HELOC as a senior citizen. Whether you want to install safety features in your home, improve the value of your home through renovations, invest in income-generating opportunities, use it on essential items while your investments are down, or any other reason, it’s important to have a plan. Receiving credit for your home equity is only beneficial if you have a budget and system to pay off your debts.