Is it wise to use your home’s equity to fund your retirement lifestyle?

It feels almost as good to pay off a mortgage as it does to begin retirement… both offer relief at last! But if your home is paid for (or soon will be), should you consider using home equity to fund your lifestyle in retirement? If you’ve owned your home for a while, you likely have quite a bit of equity; even as interest rates creep up, home prices aren’t dropping, and experts don’t expect them to. Don’t overlook the value of your own home. According to the Federal Reserve Bank of Philadelphia, home equity counts for a quarter to one-half of the median net worth of retirees.

Even if you’re well prepared for retirement, it can be liberating to realize you could be quite literally sitting on a gold mine. So, if you’ve been mulling over a home renovation – especially one that will help you live comfortably in your home well into your golden years – or even just want to sink additional funds into your investments, it might be the time to draw against the value of your home. However, this move might not benefit everyone (especially if you’re not in good shape with your mortgage or have already squeezed the equity from your home). Read on to find out if this is right for you and to see other ways to put your equity to work in retirement.

Using your property’s value to (partially) fund your retirement

Equity more or less refers to how much of your home you actually own. If you’ve paid off your mortgage, your equity is 100%. But if you still have a mortgage, it refers to the difference between what you owe on your loan and what your home is currently worth. If you owe $50,000 and your home is worth $350,000, you have $300,000 worth of equity in your home. Equity increases as you pay down your mortgage and when the value of your home jumps (which likely occurred over the last few years). And while Zillow might be fun to browse, you’ll need a licensed real estate appraiser to give you an official valuation of your property’s value.

Once you’ve determined a value, you can decide what you’re going to do with it! If done wisely and for the right reasons, drawing against the value of your home can have benefits in retirement. Here are some ideas:

Use a home equity loan to fund home improvements. A home equity loan allows you to cash out some of your equity and use it for whatever you’d like; make note that you will reap certain tax benefits by reinvesting back into your home. With this type of loan, you’ll receive a lump sum of cash that can be used to make improvements. Aging gracefully in your home becomes tricky when things like stairs, steep driveways, and narrow hallways get in the way. Use the equity to make amendments like adding a first-floor bedroom and bathroom or installing a new kitchen with more accessible features. If you have steps, consider installing a chair lift or elevator. Don’t forget the outside, too; add railings and ramps to any steep inclines.

Downsize and invest the proceeds. If you have a ton of value in your home, why not sell it and downsize? Downsizing doesn’t mean cramming your life into a studio apartment. It’s about reprioritizing your needs and finding a space that better suits you in this new stage of life. And don’t forget how hard you’ve worked to live a comfortable life. Downsizing also means less to worry about. If you decide to rent, you’ll no longer be financially obligated to things like property taxes, upgrading appliances, and home maintenance. You could instead sink these additional funds into an investment that will lead to other income.

Take out a home equity line of credit. Similar to a home equity loan, a HELOC allows you to place your home as collateral and borrow against its value. Instead of a cash payout, you’ll have a line of credit that you can tap anytime during the draw period. This option would allow you to put your money to work more strategically while taking advantage of potential tax benefits. You can do anything you want with this money, including investing it. It’s also a more flexible option for any surprise expenses or if you need to fund unexpected life events.

Purchase a second (or third) home. Why not use the cash to buy another home? Rental properties can become income–generating assets that could permanently fund your retirement. Of course, you’ll have to keep in mind any upfront costs, maintenance, taxes, etc., but rental properties have almost infinite revenue potential.

Are there any drawbacks to using home equity in retirement?

There can be many advantages to utilizing the equity in your home, especially if you’re comfortable with making creative investment choices. But, as I mentioned above, if you’re not in a great position with the value of your home or your mortgage isn’t in great shape, these options won’t work for you. Likewise, if you’re very financially conservative, don’t like managing your investments, or prefer to keep things as simple as possible, you probably wouldn’t want to do this.

Other potential drawbacks include:

Cheating your beneficiaries. Although it can be a sensitive topic to discuss, it’s essential to understand the implications of your financial decisions and how they will affect your heirs after you die. Because a home equity loan or line of credit is still a form of debt, its repayment may be due immediately upon your death. This might mean that your estate absorbs the debt, or the collateral (your home) is sold to repay the loan. If you and your children are looking forward to keeping your home in the family, this might put them in a predicament.

Potential tax implications and variable interest rates. The interest paid on your HELOC will only be tax deductible if you use the funds to improve your home. So if you’re jet-setting with the funds instead of making sweeping improvements, you could pay come tax time. And while HELOCs might be the easiest way to access your equity, they also come with variable rate interest, making repayment difficult if you’re on a limited income.

Not understanding the implications of accessing your equity. Before leveraging your home, make sure you know what you’re signing up for. The process could become hazardous if you use your home as a liquid asset instead of a strategic investment.

The bottom line

With massive gains in the housing market over the last few years, homeowners are sitting on about $22.7 trillion in home equity, so why not capitalize for retirement? Tapping the equity in your home can offer a practical and efficient solution to supplement your income – especially if you’ve discovered you have a shortfall in retirement. Overall, this option is best for those with a high level of equity in their home. No matter what retirement looks like for you, your home may remain one of your most significant assets – don’t hesitate to put it to work!