6 Ways to Use Your Home Equity to Succeed in Retirement

Many retirees have seen their home's value climb sharply in recent years, leaving them with significant amounts of equity. Tapping this home equity can be a meaningful way to succeed financially during your golden years.

Here are some key ways you can use your home equity as an important part of your retirement plan.

Set up a home equity line of credit that you can tap

A home equity line of credit (HELOC) allows you to borrow against your home equity on an as-needed basis. If you intend to remain in your home during your retirement years, the ability to lean on your home equity during cash-flow crunches can be invaluable.

For example, during a stock market dip, you could lean on funds from your HELOC instead of withdrawing money from your portfolio after it has shrunk in size. When the stock market recovers, you can stop borrowing and pay down what you owe.

Choose a home equity loan instead of a HELOC

Like a HELOC, a home equity loan allows you to borrow against your home's value. But instead of a revolving line of credit, a home equity loan involves getting a lump sum upfront and regularly scheduled repayments.

For some, the predictability of a home equity loan makes it more attractive than a HELOC. Unlike a HELOC, the interest rate will not change on most home equity loans.

Consider a reverse mortgage

A reverse mortgage allows homeowners who are at least 62 years old to tap into their home equity and use it as a tax-free income stream. Of course, a reverse mortgage isn't free cash. Instead, it's a loan against your home's value. 

But for some retirees, access to this income stream is worth paying often high borrowing costs.

A reverse mortgage may allow you to stay in your home and receive an income stream. While there are fees involved and potential hassles for your heirs, a reverse mortgage is a viable option for some retirees.

Look into the pros and cons of a cash-out refinance

A cash-out refinance involves replacing your existing mortgage with a new loan that has a larger balance. You can then pocket this extra money. 

Although you'll walk away with cash in your pocket, you'll also likely end up with a larger monthly mortgage payment. For retirees with the cash flow to handle a higher mortgage payment who are also in need of a larger cash influx, this might be a useful option.

But it's worth noting that a cash-out refinance comes with closing costs and essentially pushes off debt repayment until later. Also, your home serves as collateral, which means you could lose the property if you don't repay the loan on schedule.

Downsize and put the profit toward a nest egg

If you have substantial home equity and more space than you really need, downsizing offers a potential opportunity to get ahead financially.

When you downsize into a smaller space, you might be able to sell your existing home for enough money that you can put some of the profits into your nest egg.

Explore a home equity investment

A home equity investment (HEI) involves receiving cash for a portion of your home equity from an investor, who in turn gets a share of your property's future increase in value.

In this scenario, you'll likely receive a lump sum of cash upfront. From there, the investor has a stake in your home's future appreciation. 

Since no one can predict the future value of homes, it's impossible to know if you are getting a good deal until many years down the line. But for some retirees, this arrangement provides the necessary cash required to cover other retirement expenses right away.

The pros and cons of using equity in retirement

Like all financial decisions, tapping into your home equity in retirement comes with potential advantages and disadvantages. The most obvious benefits include access to cash, relatively low interest rates on borrowed funds, and the range of available product options to consider.

But on the flip side, using your home equity to secure a loan means putting your home on the line. If you can't keep up with the new payments, you could lose your home. 

Some products, such as reverse mortgages and HEIs, also might come with high fees, and they can make things complicated for your heirs. It's important to weigh these pros and cons to find the best solution for your situation.

Bottom line

As you prepare for retirement, it can be wise to map out the best possible use of your home equity during your golden years. Your primary residence likely represents one of the biggest assets on your balance sheet. The strategies in this list can help you make the most of this important resource.

If you are unsure about which options are right for you, consider sitting down with a financial advisor to discuss how to move forward.

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