How HELOCs Can Help Retired Homeowners Manage Expenses

Americans are sitting on a record amount of home equity, and older homeowners, who’ve spent decades paying down their mortgages and seen home values surge in recent years, are uniquely poised to cash in.

The problem? Studies show older homeowners are reluctant to tap into their property for cash, even as home equity loans and traditional home equity lines of credit (HELOC) have started to regain favor among consumers overall. HELOCS, in particular, are seeing a surge in popularity, thanks in part to their versatility.

With a HELOC, you can get approval for a line of credit, often worth up to 85% of your home’s value minus what you still owe on your mortgage. You pay interest only if you actually borrow against the line of credit. You can also borrow multiple times during a multi-year draw period, giving you more acute control over how much debt you take on compared with a standard loan.

“I find it's a useful and valuable tool for just about anybody who has home equity,” says David Kerber, a certified financial planner and managing director with Mercer Advisors.

If you eliminate home equity, the typical American’s net worth drops by more than half, according to the Pew Research Center. So older homeowners who aren’t factoring their home equity into their overall financial plan are only limiting their options, Kerber says.

Plus, a tax change next year adds another benefit to HELOCs. Between 2018 and 2025, interest paid on a HELOC was deductible only if the credit was used to “buy, build or substantially improve the residence,” per IRS rules. Starting in 2026, though, you can deduct interest paid on a HELOC used for any purpose (although you must itemize your deductions).

Can retirees actually get HELOCs?

Lenders aren’t allowed to “disfavor” older folks applying for home lending products, according to the Consumer Financial Protection Bureau.

But you will still need to meet a lender’s financial requirements to take on a line of credit, and that could be more challenging if you’re an older homeowner who doesn’t have a regular paycheck coming in anymore.

For that reason, says Neil Krishnaswamy, a certified financial planner based in McKinney, Texas, it may be best to set up a HELOC when you’re on the cusp of retirement and still have regular income coming in.

If you’re already retired, you can demonstrate you have the debt-to-income ratio required to handle a HELOC through Social Security payments, pension or annuity payments and income from investment accounts, although you may have to shop around to find a lender who will give you a good deal.

If you still have a mortgage, Kerber recommends starting with that lender, because it may be able to waive an appraisal and offer you a low-fee option. You want to pay as few upstart fees as possible if you’re getting the line of credit mainly for backup funding, he says. A bank where you have a long-term existing relationship is a good first stop, too.

Before you take the first line of credit you’re offered, though, it’s worth researching what else is on the market. Two reverse mortgage lenders recently introduced HELOC products designed specifically for older homeowners that may offer better approval odds (and better terms) for those on a fixed income. There are other lenders that offer HELOCs designed for debt consolidation.

Unlike traditional HELOCs, which typically have variable interest rates, these products usually have fixed interest rates, which may work better for retirees depending on how they plan to use them.

Krishnaswamy says, in most cases, he likes the idea of obtaining a line of credit and using it as a source of liquidity. “You have the flexibility in place, and then the other part of the decision is whether you actually utilize it,” he says.

How to use a HELOC in retirement

You can spend HELOC proceeds on just about anything. But just because you can access hundreds of thousands of dollars and spend it freely doesn’t mean you should. Generally speaking, you don’t want to rely on debt to fund day-to-day expenses, and you want to be sure you have a plan for how and when you’ll pay back anything you take out, Kerber says.

Be sure you’re looking at the long-term affordability. Many HELOCs are designed with two parts: a draw period and a repayment period. During the draw period — which usually lasts between five and 10 years — you have to make interest payments only on any debt you’ve taken out. When the draw period ends, you’ll then enter into repayment, and the amount you owe each month can jump significantly since you’ll be paying principal and interest.

It’s also smart to compare the interest rate you’d pay when it’s time to tap the line of credit with the rates you’re earning elsewhere, Krishnaswamy says. In an ideal world, the HELOC just adds to your array of funding options, so if the rates aren’t favorable when you’re ready to spend, you can look elsewhere.

Here are four smart ways for retirees to use the proceeds from a HELOC.

Complete home repairs and aging-in-place renovations

Nearly 9 in 10 adults say they’d prefer to grow old in their own home or that of a friend or family member, according to the AP-NORC Center for Public Affairs Research. Yet most homes in the U.S. are not built with aging in mind.

In that sense, retirees are like most other consumers considering a HELOC: Surveys consistently show home renovations as the top reason homeowners tap a line of credit.

Common renovations to make a home safer for long-term aging range from the relatively affordable that may be easy to pay for out of pocket — think installing grab bars on showers and making kitchen cabinets more user-friendly — to more expensive projects that need financing. Projects such as widening hallways to fit a walker or wheelchair or fully renovating a bathroom to create more space and remove tripping hazards can quickly add up to tens of thousands of dollars.

Pay off high-interest debt

Traditional personal finance rules call for entering retirement without any debt — or at least, as little debt as possible. For many folks, though, the reality is different.

A recent AARP survey found 42% of adults aged 65 to 74 carried a credit card balance, and 35% of adults 75 and older had credit card debt. If you’re one of them, you may want to consider tapping your home equity to pay off your more expensive debt. Debt consolidation, where you replace multiple debts with a single, ideally cheaper loan, is the second-most commonly cited use of a HELOC, according to a survey from fintech company MeridianLink.

With average credit card APRs sitting around 22%, swapping that debt by drawing on a HELOC, the average rate of which is currently around 8%, can lead to serious savings.

You want to be sure you fully understand all the fees involved and how much you’ll pay in interest. That’s standard protocol when you borrow money. But when you’re borrowing money to pay off other borrowed money, it’s especially important.

Plus, traditional HELOCs often come with low teaser rates that later increase, making the math a bit more complicated. Try to find a fixed-rate option for consolidation so you’ll know exactly what you'll owe over the long run.

Ultimately, you want to be sure you can pay off the new loan for a sum that’s less than the credit card debt. It’s also critical that you also want to avoid the trap of racking up new credit card debt while paying down your traditional HELOC.

Strategize your tax liability and investment account withdrawals

One of the biggest advantages of setting up a HELOC is that it gives you an option to access cash at strategic times.

In the earlier years of retirement, for example, you might be thinking about a variety of moves that have tax implications, such as converting a traditional IRA into a Roth IRA so you can make tax-free withdrawals in retirement. You’ll have to pay taxes when you convert the IRA, so you may be trying to keep other tax liabilities as low as possible, Krishnaswamy says. Since loan proceeds are not typically considered taxable income, pulling some money out of your home equity could boost your cash flow without affecting your tax bill.

Similarly, having access to a HELOC can help you avoid having to withdraw from your investment portfolio during periods of market volatility. Of course, any exercise in timing the market comes with risks, and using a HELOC to ride out market turbulence assumes that the economy will be doing better when you have to pay back your debt.

Tax strategizing and portfolio management are both more complicated uses of a HELOC, and it might be worth talking with a financial planner to make sure you understand all the nuances.

Cover emergency expenses

When Kerber talks with clients to map out their retirement income plans, they go through all their options for liquidity and access to capital. “The more flexibility we have in a plan and the more options we have, the better,” he says.

He presents a HELOC as a tool that can offer quick access to cash, should you need it to cover a major car repair, unexpected medical bills, a broken household appliance and more. Some people may be more comfortable keeping enough cash reserves on hand to cover all of these instead.

But there are tradeoffs. Keeping all your emergency fund in cash has historically meant the money won’t keep pace with inflation, he says. The precise split of cash, investments and financing that works for you will depend on your feelings about debt and risk tolerance. But having all three gives you options.

“We can say, ‘okay, we have this big medical expense. Let's sit down and come up with a plan,’” Kerber says. “Do we use cash? Do we use debt? Do we use some other instrument?”

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