How to Access Home Equity in Retirement

Budget, Benefits, and Property Tax Relief: A Quiet Place to Start

Before borrowing or selling, it helps to find out how much money is actually needed, and for how long. A look at the monthly budget is a quiet first step. List income from Social Security, a pension and savings, then set the regular bills beside it. Sometimes the shortfall turns out to be small or short-lived.

Help can also come from programs a homeowner has never heard of. The CFPB notes that state and local programs can help with utilities, fuel and home repairs. It adds that many localities have programs to help with property taxes, and that the county or town tax office can say what exists. These programs can include deferrals, exemptions or freezes, depending on where you live. The same CFPB page points to benefitscheckup.org for information about benefit programs.

A nonprofit or government benefits counselor can sometimes turn up income or help the household did not know it could claim. Family help belongs here too. A relative might share costs before the home's equity is touched at all.

When Selling or Downsizing the Home Makes Sense

For some households, the simplest answer is to sell the home. Selling turns all of the equity into cash at once, after the mortgage and the costs of sale are paid. Downsizing means selling and then buying or renting a less expensive place. That frees part of the equity and keeps the rest in the new home.

What selling provides is real. It can bring a lump sum and an end to mortgage payments. A smaller home may also cost less in upkeep and property taxes. The CFPB notes that moving to a more affordable home can reduce overall expenses.

What it trades is real too. You leave a home that may hold years of memories. Moving costs money, and finding the next place takes effort. Tax rules can apply to the gain on a sale, and a tax professional can explain how they fit your facts.

Some families consider another path: a parent moving in with an adult child. This choice suits some situations and not others, and that is a decision only the family can make.

Selling is the most complete way to turn home equity into cash, and it also means leaving the home behind for good.

Home Equity Loans and Home Equity Lines of Credit (HELOCs)

These two products let you borrow against your equity while you keep living in the home and making payments. In both, the home is collateral. Collateral means property pledged to secure a loan. The FTC explains that if you do not repay, the lender can take your home as payment for the debt.

A home equity loan pays you one lump sum, and you repay it in installments with interest. The CFPB says it usually has a fixed rate, one that does not change.

A HELOC is a revolving line of credit. Revolving means that you draw money as you need it, up to a limit, and repaying it makes that credit available again. The CFPB says HELOCs usually have a variable interest rate, meaning a rate that can move up or down, so payments may change. A lender might freeze the line if the home's value drops significantly or your finances change. If you still owe a first mortgage, the CFPB notes that either product is a second mortgage, paid in addition to the first. The difference between a reverse mortgage and a HELOC comes down largely to that monthly payment.

Being retired does not settle whether you can borrow. The CFPB notes that these loans depend on your income and credit, and the lender decides what income counts. The trade is an ongoing payment, interest cost, and the risk of foreclosure if payments stop. Rules on deducting the interest exist, and a tax professional can say how they apply to you.

Both products keep you in your home, but they ask for a monthly payment every month for as long as the balance remains.

What a Cash-Out Refinance Means for Your Mortgage

A cash-out refinance replaces the mortgage you have now with a new, larger one. You receive the difference between the new loan amount and the old balance in cash, after closing costs.

That means taking on a new mortgage with its own interest rate and its own monthly payment. The trade-offs come along with it. A new loan term can add years of payments. Closing costs reduce the cash you take home. The new rate may be higher or lower than your current one, depending on market conditions when the loan is made.

Some homeowners look at this option when their current mortgage rate is higher than rates available now, or when they need a large lump sum and can carry a monthly payment on their income. The reverse is also true. If today's mortgage carries a low rate, replacing it means giving that rate up.

Reverse Mortgages: How They Work and What They Involve

A reverse mortgage is the one option here that asks for no monthly loan payment. A homeowner 62 or older borrows against home equity. Instead of paying monthly, interest and fees are added to the loan balance each month, so the amount owed grows, as the CFPB explains. The title stays in your name. Borrowers are required to keep using the home as their principal residence, pay property taxes and homeowners insurance, and keep the house in good condition. Principal residence means the place where you live for the majority of the year. A HECM generally must be paid off when the last surviving borrower dies, sells the home or no longer lives there. If an eligible non-borrowing spouse survives the borrower, HUD's rules can defer repayment for as long as that spouse continues to meet HUD's conditions. The CFPB says it may come due sooner if the taxes, insurance or repairs fall behind. More background is in what a reverse mortgage is.

The most common type is the Home Equity Conversion Mortgage, or HECM. HUD says it is the only reverse mortgage the federal government insures, and that it is available only through an FHA-approved lender. FHA stands for the Federal Housing Administration, part of HUD. Under 24 C.F.R. § 206.33, "The youngest borrower shall be 62 years of age or older at the time of loan closing." Private reverse mortgages, sometimes called proprietary loans, may set different terms.

Federal law sets other conditions. Under 12 U.S.C. § 1715z-20(d), the borrower must receive counseling from an independent third party and full disclosure of costs, and the home must be a 1- to 4-family dwelling the borrower lives in. The statute also says the homeowner is not liable for any shortfall beyond what the home's sale recovers. Federal rules limit the origination fee, which may be fully financed, and the lender discloses it.

The three main payment choices are a line of credit, a monthly payout for a set number of years or for as long as you maintain the loan, and a lump sum, and the line of credit can be combined with a monthly payout, per the CFPB. How much may be available depends on factors including the youngest borrower's age, the interest rate and the home's value. The CFPB warns that you could face foreclosure if you cannot pay property taxes or insurance. A reverse mortgage is a loan, not income or a benefit, and it is one option among several.

A reverse mortgage changes the shape of the debt rather than removing it, and the obligations that come with it are real and ongoing.

Comparing the Options: What Each Involves and What Each Trades

Seeing the options side by side can make the differences clearer. The table describes; it does not choose.

Which option fits depends on income, health, how long you plan to stay, and what the family wants for the home later. A HUD-approved counselor or a financial professional can help think it through.

No single option fits every household, and seeing them side by side can help you and your family ask sharper questions.

Questions Worth Asking When Your Family Is Deciding

A few plain questions often show which options deserve a closer look. They work well for a family conversation, and for a meeting with a counselor:

• How long do I plan to stay in this home?
• Do I need one lump sum, or money over time?
• Can my fixed income carry a monthly payment, even if it rises?
• Can I keep paying property taxes, insurance and repairs for years to come?
• What do I want to happen to the home later, and who else lives there?

A HUD-approved housing counselor can walk through these options. The CFPB connects callers to a HUD-approved housing counseling agency at (855) 411-2372. For a HECM, the counselor must discuss alternatives too. Under the federal statute, counselors also disclose that a HECM may have tax consequences, may affect eligibility for federal and state programs, and may affect the estate and heirs.

A financial professional or tax professional can look at the wider retirement picture. Taking the time to understand each option before deciding is a sound and calm place to begin.

A counselor or financial professional can help you work through these questions with your own income, home and family in mind.