Retired With a Paid-Off House but Need Money

What the Budget and Benefits Picture Looks Like First

Before the house comes into it, the first question is where the money is going and where more could come from. A homeowner can list each source of fixed income, such as Social Security, a pension and withdrawals from retirement accounts, and set it against monthly costs. Sometimes the gap is smaller, or different, than it first seemed.

Programs that lower everyday costs

Next is a benefits check. Programs exist that lower everyday costs, including help with property taxes, utilities, prescriptions and home repairs. The Consumer Financial Protection Bureau says state and local programs can help with utilities and fuel payments, as well as home repairs, and that many localities have programs to help with property taxes. It points readers to their county or town tax office and to benefitscheckup.org.

In practice, this check tends to cover a few areas:

• Property taxes. For a homeowner with no mortgage, the tax bill is often one of the largest housing costs left. Local relief programs vary, and the county assessor or tax collector publishes current rules, amounts and deadlines.
• Utilities and fuel. State and local programs can help with these payments, which matter most in the coldest and hottest months.
• Home repairs. Repair help can address the kind of expense, such as a roof, that often prompts the question of tapping the house in the first place.

Because these programs reduce costs rather than add debt, they can change how much money is needed from any other source.

Family help and selling

Help from family is another option. It works best with a clear agreement about whether money is a gift or a loan. Large gifts can raise tax questions, which a tax professional can explain.

Selling or downsizing turns equity into cash and may lower housing costs, but it means leaving the home. The IRS publishes the current rules on excluding gain from the sale of a main home.

For many households, this step alone changes the size of the problem.

Home Equity Tools: What Each One Actually Does

Each of these tools uses the house as collateral, meaning the lender can look to the home if the loan is not repaid.

Home equity loan. The lender pays a single lump sum. The borrower repays it in fixed monthly payments over a set period. It adds a monthly bill to a budget that had none.

Home equity line of credit (HELOC). This is revolving credit: a borrowing limit the homeowner can draw from, repay and draw from again, much like a credit card. The interest rate is often variable, so payments can change. Monthly payments are required. The CFPB notes that a home equity loan or line of credit carries its own risks, usually has monthly payments, and depends on income and credit.

Cash-out refinance. This normally replaces an existing mortgage with a larger one, and the borrower keeps the difference. On a paid-off house, there is no old loan to replace, so the homeowner takes on a brand-new mortgage and a new monthly payment.

Reverse mortgage. A Home Equity Conversion Mortgage (HECM) is, in HUD's words, the only reverse mortgage insured by the U.S. Federal Government, and it is available only through an FHA-approved lender. It is a loan for homeowners 62 and older that requires no monthly mortgage payment, though the amount owed rises over time. The next section explains how that works and what the loan requires.

None of these is free money, and none fits every situation.

How a Reverse Mortgage Works — and What It Requires

The worry behind this question is often simple: what is the catch? A reverse mortgage lets a homeowner borrow against equity while living in the home, and the CFPB puts it plainly: it is not free money. Interest and fees are added to the loan balance each month, so the amount owed grows and equity shrinks. Title stays in the homeowner's name.

The borrower has ongoing duties. The CFPB says the homeowner must use the property as a principal residence (where they live most of the year), pay property taxes and homeowners insurance, and keep the house in good condition. The loan must be repaid when the last borrower, co-borrower or eligible spouse sells the home, moves out or dies. Under federal law, 12 U.S.C. § 1715z-20(b), an eligible homeowner is one "who is, or whose spouse is, at least 62 years of age or such higher age as the Secretary may prescribe."

Counseling comes first. Federal law, 12 U.S.C. § 1715z-20(d), requires the borrower to have "received adequate counseling" from an independent third party. The counselor must discuss options other than a HECM and the loan's financial implications, among other topics. HUD's HECM page links to its HECM Counselor Roster, where counselors are listed.

Payment options under the statute include a line of credit, monthly payments for a set term or for as long as the borrower lives in the home, and combinations of these. The CFPB also describes a lump sum.

How much may be available depends on the age of the youngest borrower or eligible non-borrowing spouse, the interest rate, and the home's value or the FHA limit. HUD publishes the current limit. Federal rules also cap the origination fee, which may be fully financed into the loan, and the lender discloses it. These are the outlines of how a reverse mortgage works.

Comparing the Trade-Offs Side by Side

The options differ in a few ways that matter to a household on a fixed income.

Every borrowing option carries some risk to the home. With a home equity loan, a HELOC or a cash-out refinance, missed payments can lead to foreclosure. With a reverse mortgage, the CFPB warns that a borrower could face foreclosure if they run out of money for property taxes, insurance or other housing costs.

Different facts point to different tools. A homeowner who wants a lump sum and can handle a monthly payment is in a different position from a homeowner 62 or older who wants to stay put without a new monthly loan bill. The CFPB also notes that if a move may come soon, a reverse mortgage is an expensive way to cover short-term needs. A closer look at a reverse mortgage vs. a HELOC shows how the balances move in opposite directions.

Seeing the trade-offs side by side can make it easier to recognize which situation matches yours.

Questions Worth Sitting With Before You Decide

A decision this large tends to get clearer once a few personal questions are answered:

• How long will I stay here? A short stay changes the cost picture for any loan.
• Do I need a lump sum or steady money? Each tool pays out differently.
• Can I manage a monthly payment? Three of the borrowing tools require one.
• What do I want for the home and my heirs? Borrowing reduces what is left to pass on.

The FTC cautions readers not to rely on a salesperson and notes that nobody has to buy annuities or other products to get a reverse mortgage. It also says that with most reverse mortgages there are at least three business days after closing to cancel for any reason, without penalty.

Different professionals handle different parts. A HUD-approved counselor handles HECM counseling. A lender explains its own terms. A financial planner can look at the whole budget, and an attorney or tax professional can explain estate and tax questions. A side-by-side look at the ways to get money without selling can help a family prepare for those conversations.