Is a HELOC Right for Your Retirement Plan? Ask Yourself These 8 Questions

If you're an older homeowner heading into or already enjoying your retirement, being able to cover your expenses and live comfortably is a top priority. Sometimes, though, you may need extra cash to help you meet those needs, and using the equity you've built up over time could provide the perfect solution.

Because of the rapid increase in home prices during the pandemic, homeowners are sitting on near-record levels of equity — a source of cash that is a valuable tool as they navigate retirement, says David Rosenstrock, a certified financial planner and director of Wharton Wealth Planning.

One common way to tap into that cash is a home equity line of credit (HELOC). When considering taking out a line of credit, it’s important to make sure you understand how it works and how it will fit into your retirement strategy. These 8 questions can help you figure out whether a HELOC is right for you.

How do I plan to use a HELOC?

Although there are no limitations on how you can use the money you get from a HELOC, Rosenstrock says you should be cautious about what you spend it on. Remember that a HELOC is a lien on your home, and misusing the line of credit can lead to financial trouble down the line.

Consider how a HELOC can help you achieve your financial goals. A good use of the credit line, for example, is replacing an old roof, remodeling a kitchen or making other necessary home upgrades to help you age in place. Using a HELOC for home renovations can pay off in two ways: The interest paid on the line is tax-deductible, and the improvements help increase the value of your home if you decide to sell. And it gets even better. Up until this year, interest was only deductible if used for home projects, but starting next year, the tax deductibility perk applies regardless of how you use the money.

Using a HELOC to consolidate higher-interest debt, like credit cards, or to pay off expensive private student loans or a hefty medical bill, can also help you improve your financial position. It can also come in handy if you need some extra cash to pay for utilities or prescriptions at a period of time where, for example, you don’t want to withdraw from your savings. But you want to be careful about relying on debt for regular, recurring expenses over the long haul. These actions may solve an immediate problem, but will leave you with more debt you'll have to repay. (If you need cash to help cover day-to-day expenses, there are other ways you can tap your home equity that may be a better fit. More on that below.)

What kind of interest rate does a HELOC have?

Once you've determined how you'll use the HELOC, it's time to look into the interest rate, as it will affect how much you'll have to pay back to the lender.

Most lines of credit have adjustable, or variable, rates, meaning the interest charged can change periodically based on market conditions. If interest rates go down, your monthly payment will go down as well. But if rates increase, your payments will rise.

When considering an adjustable-rate HELOC, ask if there is a cap or maximum rate the lender could charge. You can then calculate the maximum payment amount you may be required to pay and see if it's within your budget.

"These are risks that need to be understood," Rosenstrock says. "How a variable interest rate could affect a fixed income."

Some lenders, however, offer a fixed interest rate, which means your monthly payments will remain the same throughout the HELOC's term. Having a fixed rate can be an advantage because you don't have to worry about whether your monthly bill could spike due to rising interest rates.

In general, most experts recommend a fixed-rate loan because payments are predictable and easier to budget for, especially if you're on a fixed income that won't change significantly year over year.

However, if you are confident that you can repay the line of credit within a few years, an adjustable-rate HELOC may offer more affordable monthly payments, since adjustable rates tend to start lower than those that are fixed.

According to data analysis firm Intercontinental Exchange, the average HELOC rate has decreased from an average of 10% in 2024 to about 7% at the end of September. Most experts are also forecasting that rates will continue to decrease moving into next year, which would lead to even lower borrowing costs.

When do I have to repay a HELOC?

HELOCs work differently than traditional loans because you don’t start full repayment right away.

HELOCs have two phases: The draw period is when you can withdraw money from the line of credit. You can also repay the amount withdrawn and keep the credit line fully funded. During the draw period, you'll be responsible for making interest-only payments on any amount withdrawn and still outstanding. Most HELOCs have a draw period of five to 10 years, though you can find lenders who offer shorter and longer options.

Keep in mind that some lenders allow you to take out a HELOC without having to immediately withdraw funds. This could be a nice feature if you want to use the HELOC as a safety net in case of a future emergency or if you know you're planning repairs in the near future, but can lock in a great rate by taking the line of credit out now.

Other lenders may require you to withdraw a minimum amount or a percentage of the line of credit once it's opened.

Once the draw period ends, you will no longer be able to withdraw funds and must begin paying back the principal and interest on any outstanding balance. This repayment period also varies by lender and could range from five to 30 years.

Note that HELOC repayment periods can be structured to include what’s called a balloon payment. Some lenders require a balloon payment as soon as the draw period ends. Others have one at the end of the repayment term, at which time all the outstanding balance is due. Either way, if you choose a HELOC with this feature, you have to be sure you can afford a large lump sum payment — often tens of thousands of dollars.

How much does a HELOC cost?

Another important factor to consider is how much you may have to pay to take out a line of credit. According to Mason Whitehead, home loan specialist at Churchill Mortgage, the costs associated with a HELOC are similar to those of a traditional mortgage and are typically rolled into the line of credit.

"It's very little out of pocket required, other than maybe an appraisal," Whitehead says.

Among the fees you should expect to pay are the closing costs, title search and insurance costs, origination fees and attorney fees. These costs can range from 2% to 5% of the credit line amount. You also want to ask about any separate charges the lender may require.

For example, some lenders may charge an annual fee to keep the HELOC open, or you may have to pay a penalty if you pay the line of credit off early. There may also be what's called a recoupment fee, which a lender could charge if they've covered part or all of your closing costs and you decide to close the HELOC within a short period of time.

Make sure you understand all the possible fees and the circumstances under which they are triggered, so you can compare with other lenders and choose the best option for you.

Can I qualify for a HELOC if I'm on a fixed income?

Researchers have found that home equity can be a solution for many cash-strapped retirees. A recent Vanguard study, for example, shows that tapping home equity can boost the number of baby boomers who have enough to live comfortably. The challenge for retirees on a fixed income is that they may have difficulty actually accessing their home equity.

Lenders base their approval decision on several factors, including your credit score, the value of your home and your ability to repay, typically measured by your debt-to-income (DTI) ratio. Your age or whether you're on a fixed income does not automatically disqualify you from taking out a HELOC. But being on a fixed income can make approval harder. Depending on how much money you have coming in each month, lenders may worry about your ability to repay.

For that reason, older homeowners living on a fixed income may not qualify for as large an amount as someone who is employed and whose income is likely to increase over time, Whitehead says.

You do still have options, though, if you’re only approved for a small amount or can’t qualify at all based on your income.

HELOCs have been attracting a lot of attention from homeowners over the last few years as rising home prices have driven large equity gains. Many lenders have developed new loan programs to make tapping into that equity more accessible, including a couple of reverse mortgage companies that have rolled out HELOC products designed specifically for older homeowners and retirees.

Because they are designed for older homeowners, these products offer easier, more flexible qualification and repayment options for those living on a fixed income and are worth a look when you compare HELOCs.

Will I be able to afford the HELOC payments long-term?

Once you know the amount you can qualify for, you want to ensure you can comfortably afford the required payments. It's the reason why it's important to fully understand the draw and repayment phases of the HELOC.

If you have an extended draw period — 10 years, for example — during which you only have to pay interest on the amount withdrawn, it's easy to get used to those lower payments and continue to draw cash out of the credit line.

When the repayment period begins, however, you may be in for what's known as payment shock. You will now be responsible for paying both principal and interest on the outstanding HELOC balance, which can be significantly higher than your interest-only payments. If you have a large outstanding balance and a short repayment period, your payments are likely to be even higher.

If you are on a fixed income, you must think about where the money to pay the debt will come from. Are you relying solely on Social Security, or do you have investment accounts, such as a 401(k) or an IRA, that you can tap into? Do you have a pension, and does it provide a fixed monthly payment or does the payment depend on your contributions and the performance of its investment?

Review all your current and future income sources to ensure you can afford the HELOC payments throughout the loan's term. If adding a sizable debt bill in retirement sounds stressful, you may want to consider products aimed at older homeowners. Some, for example, allow you to make interest-only payments or payments as little as 1% of the balance until you leave the home, similar to how a reverse mortgage works.

What happens if my income or home's value changes?

Of course, life can sometimes throw curveballs at you, and your cash flow can change due to unforeseen circumstances. Did you retire prematurely or lose your job because of illness or a company restructuring? Did your stock portfolio take a hit and lose a lot of value? Rising utility and insurance costs can also take a bigger chunk out of your monthly budget than anticipated.

Each lender handles changes in your financial position differently, which is why Whitehead recommends asking about their policy and the potential consequences. Mortgage lenders and large banks, for example, may not take action if your income or home value changes as long as you're making the required monthly payments on time.

However, some smaller banks and credit unions may include the right to periodically review your finances as part of the HELOC agreement. In this case, your lender may decide to reduce or freeze your line of credit if you have experienced a drop in your credit score, a loss of income or your home's value has decreased.

If you fall behind on payments or can no longer make them, the lender can call the loan due and demand immediate repayment, or begin foreclosure proceedings on the property. Make sure you understand a lender's policy on changes to your HELOC due to shifts in your personal finances.

Is a HELOC a good option for me?

Once you've gathered all the information you need, it's worth taking a step back and considering whether a home equity line of credit is the right choice, or if there are other options that better fit your needs.

A HELOC could be the best option if you are unsure of the exact amount you need or want the ability to draw smaller amounts over an extended period.

For example, you want to renovate your home to make it easier to age in place, and you will be using different contractors for each step of the project, making payments as the work progresses. A HELOC allows you to withdraw only the amount needed, leaving the rest of the line of credit available for future draws while limiting the amount of interest you pay.

However, if you want to tap into your home equity to pay for a large, one-time expense, such as a medical bill, you may want to consider a home equity loan, which pays out a lump sum and typically comes with a fixed interest rate. Another option is a cash-out refinance, which could make more sense if you need a large sum of money and the interest rate you qualify for is lower than your current mortgage rate.

If your finances won’t allow for you to take on a new debt payment, you may want to look into a reverse mortgage. These loans don’t require monthly payments as long as you meet the loan obligations, including keeping current on property taxes, insurance and maintenance. Instead, they’re usually paid back by selling the home when the borrower (or their spouse) leaves the property. You (or your heirs) do have the option of paying off the reverse mortgage to maintain ownership of the property, though.

Using the equity you've built up in your home can be an important tool in your retirement strategy, but there are risks involved. Taking on extra debt on a fixed income can be a blessing that can quickly turn into a curse if you go into it unprepared. So don't be afraid to ask questions and shop around for the best fit. Ultimately, the right choice will depend on your goals, your risk tolerance and your confidence in your ability to repay.

You want to “understand what the risks are going into it," Rosenstrock says. "Make a good, comprehensive decision, weighing all the benefits and the risks."

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