If you’re in your 50s or 60s and thinking ahead to retirement, you might be wondering if your home could play a role in your financial strategy. For many, a house is more than just a place to live – it’s a financial asset that could help provide cash flow in retirement.
The question is, how can you use that asset wisely?
Here at Consolidated Planning, our efforts revolve around organizing your financial world, protecting what’s most important, and focusing your resources to efficiently achieve your retirement goals.
There are several ways to access your home equity, each with benefits and drawbacks. The right choice depends on your goals, income needs, and how long you plan to stay in your home.
Calculating Home Equity
The equity of your home is the portion of your property you truly own – the difference between your home’s current market value and the remaining balance on your mortgage. Your ownership stake. To calculate this value, you subtract what you still owe on the mortgage from what your home is worth today. Here’s what might make sense for you:
Reverse Mortgage
A Reverse Mortgage or Home Equity Conversion Mortgage (HECM) is a government-backed loan for homeowners aged 62 and older. Instead of making payments to the lender, the lender pays you—either as a lump sum, fixed monthly payments, a line of credit, or a mix of these options. The loan is repaid when you sell the home, move out, or pass away.
A HECM line of credit grows over time, increasing the amount available to borrow and is independent of the home’s value or market growth. This feature makes it a useful tool for retirees who want to keep their investments intact when markets are down.
A key advantage of a HECM is that it does not require monthly mortgage payments. Borrowers must, however, continue to pay property taxes, insurance, and upkeep costs. Unlike a home equity loan or HELOC, a HECM cannot be frozen or reduced by the lender.
The main drawback with your reverse mortgage is that interest does accrue over time, reducing the home equity available for your heirs. That said, federal mortgage insurance ensures that neither borrowers nor their heirs will owe more than the home’s value when sold.
Home Equity Loan
A home equity loan provides a lump sum with a fixed interest rate and monthly payments. This is useful for retirees who need cash for a large one-time expense, such as home renovations or medical bills.
The challenge? Monthly payments can be a burden on a fixed income. Unlike a HECM, a home equity loan requires borrowers to qualify based on income and credit, which can be difficult in retirement.
Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) allows you to borrow against your home as needed, similar to a credit card. Interest rates are typically lower than other loans, but they can change over time, leading to higher payments.
A major risk with a HELOC is that lenders can freeze or cancel credit lines, particularly in economic downturns. Many homeowners learned this during the 2008 financial crisis. In addition, borrowers must also start repaying both principal and interest once the draw period ends, which can lead to payment shock.
Selling Your Home and Downsizing
Some retirees sell their home and move to a smaller property to free up cash and reduce expenses. This can be a practical choice, but moving costs, real estate commissions, and potential taxes should be considered.
The decision to downsize isn’t just financial. Leaving a home filled with memories and adjusting to a new community can be difficult. Some retirees find that the expected cost savings are not as large as they had hoped.
Options To Consider For Your Retirement Plan
Consider Paul and Christine Kelly, a couple in their late-50s with a successful business and a diversified investment portfolio. They want to keep their investments growing while ensuring steady cash flow after selling their business in a few years.
A home equity loan or HELOC would require them to make monthly payments, which could be stressful if their business income fluctuates. And selling their home might not be ideal, as they want to remain in their current location near family.
A reverse mortgage or HECM line of credit could provide flexibility for these retirees. They could open the credit line at age 62, let it grow, and use it only when needed, such as after a market decline. This approach would help preserve their investments while having access to a growing cash reserve.
Common Misconceptions
Some homeowners hesitate to explore a HECM due to some common myths:
- I’ll lose ownership of my home. False. Borrowers retain ownership and can sell or pass the home to their heirs.
- A HECM is only for those struggling financially. Many financially independent retirees use a HECM strategically to avoid withdrawing from investments at the wrong time.
My children will be stuck with debt. HECMs are non-recourse loans, meaning heirs are not responsible for any shortfall if the home’s value is less than the loan balance.
How Can Your Home Equity Help You Reach Your Retirement Goals?
Your home is one of your biggest assets, but using it wisely requires planning.
And by considering your home equity as another financial resource, you will have more options when designing a balanced retirement income strategy.
To understand your options when it comes to a Home Equity Conversion Mortgage, Home Equity Loan, or downsizing altogether, talk with a financial professional at Consolidated Planning to find the right path for you.
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Exp. 4/2027
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of James M. Matthews and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
