Retirees' Hidden Asset: Home Equity Options for Older Homeowners
Owning a house is one of the most common ways older Americans have built up wealth. Thanks to decades of homeownership, plus extreme appreciation over the past several years, baby boomers boast more than $17 trillion in home equity, according to the Federal Reserve.
That means pre-retirees and folks who’ve already left full-time work may have a major retirement asset hidden in plain sight. Recent Vanguard research finds that by unlocking home equity, the share of baby boomers who have sufficient income in retirement could grow from 40% to 60%.
There are a variety of financing options designed to allow homeowners to use their equity, which refers to the difference between your home's value and what you owe on the property. Almost all of them come with fees that you’ll need to factor in when weighing the costs and benefits, and in some cases, you could face foreclosure if you default on your loan. But when used smartly, home equity can help you build a more comfortable retirement plan. Here are five strategies for tapping your home equity as you get older.
Home equity loan
Pros:
- Simple financing for one-time funding
- Fixed interest rate and predictable payments
- Interest can be tax deductible
Cons:
- Can lead to higher overall interest charges
- Doesn’t allow you to borrow more if you need it later on
A home equity loan allows you to access a lump sum based on how much equity you have in your home. Because you receive a one-time dispersal, these loans are typically best for a project or other single use where you know exactly how much money you’ll need. For instance, many homeowners use home equity loans to finance renovations or updates that will make aging in place easier.
To qualify for a home equity loan, you typically need to have at least 20% equity in your home, plus a decent credit score and debt-to-income ratio. More equity translates to more borrowing potential; many lenders will let you borrow up to 80% of your equity.
Interest paid on home equity loans (and HELOCs, which we cover below) will be tax deductible starting in 2026 — no matter what you spend the loan proceeds on. For the past several years, interest was only deductible if you used it on home renovations.
Home equity loans usually have a fixed interest rate, making repayment more predictable. Once the loan is finalized, you’ll get the funds and then immediately start repaying it in monthly installments, typically over a 10- or 15-year period. Be sure to understand any upfront fees (application, appraisal and closing fees are all common, though many lenders will waive some of these). And keep in mind that you are using your home as collateral, which means the bank can foreclose on it if you default on your loan.
Home equity line of credit (HELOC)
Pros:
- Flexibility to borrow as you need
- Only pay interest on amount borrowed
- Can be set up and used just for emergencies
- Interest can be tax deductible
Cons:
- More complicated payment structure
- May have variable interest rate
- Some are set up with “balloon payments”
- Can be restricted during periods of market volatility
Home equity lines of credit stem from a similar logic as home equity loans: You can borrow against the portion of your home you’ve paid off. But HELOCs offer a revolving line of credit, functioning more like a credit card (albeit with a much lower interest rate). Like a home equity loan, you’ll typically need at least 20% in your home to qualify, though some lenders will approve HELOCs for homeowners with less equity.
After you take out a HELOC, you can tap the line of credit as needed up to your approved limit, giving you more control over how much you borrow. This flexibility makes HELOCs a great option for hedging against unexpected expenses down the road. You can set up the line of credit even if you don’t immediately need cash, and then use it if your heating system calls it quits in the middle of January, for example.
That said, it’s critical you understand how your HELOC actually works, since it is structured differently than a regular loan. Most traditional HELOCs have a draw period of up to 10 years, during which you can borrow as you like. Interest will only accrue on the amount you’ve actually borrowed, not the full line of credit, and during this period, you make interest-only payments. After the draw period ends, an up to 20-year repayment period begins. During this time, you can no longer borrow cash, and you’ll begin full — meaning principal and interest — payments. Because of this, you should be prepared for your bill to increase significantly when repayment begins. You'll also want to check whether your HELOC comes with a balloon payment, where you’ll owe a large lump sum at the end of your term.
Not all HELOCs are structured that way. You can look for one that has a fixed interest rate and a fully amortizing repayment period, meaning you’ll have predictable payments for the entire loan term. Two reverse mortgage lenders even recently introduced HELOC products designed specifically for older homeowners on fixed incomes.
Like a mortgage or home equity loan, HELOCs are secured debt in which the lender considers your home collateral. One unique downside to note: Banks can reduce or revoke your line of credit during an economic downturn. That’s unlike any other home equity options on this list.
Cash-out refinance
Pros:
- Possible to get a lower interest rate on mortgage
- Can lower monthly mortgage payment through an extended term
- Interest paid is tax deductible if loan is used for home renovation
Cons:
- Not as attractive during periods of high interest rates
- Have to restart your mortgage payoff timeline
- Higher upfront fees than other home equity lending options
More than 40% of homeowners aged 65 to 79 had a mortgage on their primary home as of 2022, according to the Harvard Joint Center for Housing Studies. A cash-out refinance could allow those homeowners to replace their current mortgage with a new one and get an additional lump sum of cash as part of the deal.
For example, if your home is worth $400,000 and you still owe $100,000, a cash-out refi worth $200,000 would allow you to pay off your balance and have $100,000 left over. The effect on your monthly payments can vary: Because the new mortgage will be higher than your existing mortgage debt, your monthly payments could increase. Or you may be able to keep your payments down through a combination of lower interest and a longer repayment term.
Unlike a home equity loan or HELOC, both of which can require a second debt payment on top of your mortgage, a cash-out refinance rolls everything into a single loan. But cash-out refinances are typically more expensive than other home equity options, with closing costs ranging from 2% to 6% of the loan balance.
The market for cash-out refinances was booming in 2021, as home values soared while mortgage rates remained historically low. But interest has dried up in recent years, as mortgage rates have been stuck above 6%. As of January 2024, just 6% of baby boomer homeowners had a mortgage rate of 7%, while more than half paid a rate of 4% or below, according to Freddie Mac. That means the majority of baby boomers would have to wait for today’s rates to drop considerably before a cash-out refinance would make much financial sense.
Reverse mortgage
Pros:
- Requires no monthly payments as long as you continue to meet the loan obligations
- Multiple payout options
- Remains active as long as you live in your home (and meet basic loan requirements)
Cons:
- Typically requires more home equity than other options
- Can reduce the amount home equity passed on to heirs
- Best suited to people who expect to stay in their home for a long period of time
A reverse mortgage is a unique financial tool. When you take out a reverse mortgage, you borrow against your home equity — much like the other options on this list. But unlike with those options, you don’t have to make any payments as long as you remain in the home and meet the loan obligations. Instead, the lender actually pays you in the form of a lump sum, line of credit or monthly installments. (You can choose one method or a combination of payment types.)
That design makes reverse mortgages a useful way to supplement retirement income over a long period of time, as reverse mortgage proceeds can be spent on anything from home improvements to medical expenses to groceries. The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM), a federally insured product only available to homeowners 62 and up. Because the HECM program is governed by the Federal Housing Administration, lenders have to follow strict guidelines on borrowing limits, loan counseling and more. You need significantly more equity for this product than for a home equity loan or line of credit; most lenders require borrowers to have about 50% equity.
(If you’re younger than 62, you may still qualify for a proprietary reverse mortgage. These are offered by private lenders, and they’re often called jumbo reverse mortgages since they don’t have the same loan limits as HECM loans.)
Like with the other home equity options mentioned above, your property serves as collateral for the reverse mortgage. As part of the loan agreement, you have to keep up with home insurance, property taxes and home maintenance. When you (and any co-borrowers you may have) permanently move out, sell the property or die, the loan becomes due. Homeowners (or their heirs) typically sell the property to repay the reverse mortgage. You don’t have to worry about owing the bank more than your home is worth; reverse mortgages are “non-recourse” loans, meaning lenders cannot pursue any payment that exceeds that value of the collateral.
Selling and downsizing
Pros:
- Can make you money
- Can reduce your monthly expenses
- Lets you choose a new home with easier upkeep
Cons:
- May have to leave behind your community
- Profits depend on the current housing market in your area
- Stress (and costs) associated with moving
- Can make it harder to host kids and grandkids in the future
You may not first think of selling your home as a way to use your home equity. But it’s actually the option that can give you the most upfront liquid capital.
How much cash you can end up with depends on several factors, including your home value, the real estate market when you sell and where you plan to move after selling. The idea, though, is to earn enough from the sale to help pay for your retirement.
The exact details of how a home sale supports your golden years can look different depending on the person. For example, if you’re still paying down your home, you could use the sale proceeds to buy a more affordable property that you purchase outright so you don’t have to worry about a monthly mortgage bill. If you still need to borrow to afford a new home, you could cut your monthly expenses by choosing a less expensive place or a smaller home that has cheaper property taxes and more affordable utilities. Alternatively, you could sell your home and become a renter, ideally having enough cash to comfortably cover rent each month and supplement your Social Security income.
Still, downsizing ahead of or during retirement is a pretty unpopular move. About a quarter of older homeowners say they would consider it, according to a 2024 Fannie Mae survey. But 56% are strongly opposed, saying they never plan to sell.
The range of reactions likely has less to do with the financial factors than the more qualitative ones. On the upside, selling is an opportunity to transition to a residence that is better suited to getting older, like a single-story dwelling, or requires less maintenance, like a condominium where you don’t need to worry about lawn care.
But selling can require a lot of time and effort. Downsizing sometimes means moving away from family and friends or dealing with the emotional toll of cleaning out keepsakes and leaving a place that may hold decades of memories.
Regardless, it’s a smart idea to at least research how much your home may fetch and look into what your monthly expenses would be after relocating. That way you can compare downsizing against other strategies to use your home equity to fund a comfortable retirement lifestyle for as long as you need it.
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