How to Turn Your Home Into Retirement Income Without Selling It

If you’ve been a homeowner for a while and built up considerable equity in your home, you can use this equity to generate needed retirement income without having to sell your home.

Key Takeaways

• If you have built up a lot of equity in your home, you may wish to tap into it. Doing so will boost your retirement income and pay for unexpected expenses.
• With a reverse mortgage, some of your home’s equity gets converted to cash, but you’ll pay high fees. You’ll also need to be 62 or older to qualify.
• A cash-out refinance gives you a brand-new, larger mortgage and access to cash, plus higher mortgage payments.
• A home equity line of credit (HELOC) allows you to tap your home’s equity with ease. Working like a credit card, interest is not applied to any of the credit line that you don’t use.
• Consider the costs of each home equity option, including interest rates, fees, and higher payments. As a homeowner, you are free to use your home’s equity, but you want to make sure you use it wisely.

Understanding Home Equity

If you have owned your home for a number of years, there’s a good chance you’ve built up a good chunk of home equity. This can be a valuable resource in your retirement years.

“Home equity is the difference between the market value of a home and the amount still owed on the mortgage,” said Shaun Osher, founder and chief executive officer of Core Real Estate. “Generally, as homeowners pay down and contribute to their mortgage, their property value increases, and their equity grows in the background. This is mostly why people consider their homes to be a major asset—sometimes their most significant asset—as they approach retirement.”

For retirees without many other resources, tapping the home equity in their homes can provide needed retirement income that can be used to pay for medical and other expenses.

Options for Generating Income From Home Equity

Here is a closer look at three options for tapping into a home’s equity: a cash-out refinance, a reverse mortgage, and a home equity line of credit (HELOC).

Cash-out Refinance

With a cash-out refinance, you get a new mortgage and access to cash.

“A cash-out refinance is when a homeowner replaces their current mortgage with a new, larger mortgage. They then will receive the difference between the two loans in cash,” Osher says. “Essentially, it’s a way of benefiting your home’s growth in equity without having to sell.”

A cash-out refinance is one way of getting a lot of cash out of your home in a hurry.

“This approach is particularly appealing to retirees who need a large sum of money quickly for unexpected expenses,” Osher says.

But there are downsides. With a cash-out refinance, you increase the size of your mortgage, and that means larger and longer mortgage payments.

“One of the main issues with a cash-out refinance is that it resets your mortgage timeline, so your debt extends into the later years of your life,” Osher says. “If the home value drops, that could leave the homeowner with less equity than they previously thought.”

Reverse Mortgage

Taking out a reverse mortgage is another way to turn equity in your home into cash.

“A reverse mortgage turns your home’s equity into income, but rather than paying a lender, the homeowner receives it,” Osher says. “It’s only available to homeowners age 62 and older, and allows them to stay in their homes. They receive a lump sum, monthly payout, or a line of credit, depending on their preference.”

But there are drawbacks to consider—since reverse mortgages involve borrowing against the equity in your home, they can add to your debt and reduce your home equity. Additionally, many reverse mortgages have variable interest rates, which means that the interest rate may increased based on the economic environment.

“While the loan doesn’t require monthly payments, there are strings attached. Fees can be higher than the average loan, the interest on the loan accumulates, and the equity that’s left to heirs in the event of the homeowner’s passing is significantly reduced,” Osher says.

To qualify for a reverse mortgage, your credit will be evaluated. If your credit is not great, you could get stuck paying high fees.

“The fees charged by the lender can be significantly higher when poor credit comes into play,” says Bruce Maginn, an advisor at Solomon Financial.

Before taking on a reverse mortgage, you may want to seek out the advice of a financial advisor who can guide you through whether it’s the right decision for you.

“It’s a relatively complicated financial move, and often can be an emotional one, so it’s important to consult a financial advisor who can take a holistic look at your financial situation and make an informed, objective recommendation,” Osher says.

Home Equity Line of Credit (HELOC)

A simple way to access your home’s equity is with a home equity line of credit (HELOC).

“Basically a credit card secured by your home, HELOCs give you access to a line of credit, up to a certain limit, allowing you to borrow what you need and repay it over time,” Osher says. “The biggest advantage of a HELOC for retirees is the flexibility it offers, especially if your expenses are not set in stone. They usually carry a lower interest rate.”

Like reverse mortgages, there are downsides to using HELOCs as well—because they have variable interest rates, interest rates can increase and monthly payments can be hard to budget for.

“If you fail to pay the balance, your home is then at risk,” Osher says. “If you’re particularly disciplined with money and a wise spender, this could be a great option, as long as you have a long-term plan to manage the new debt.”

Advantages and Disadvantages of Using Home Equity for Retirement Income

Before using your home’s equity to boost your retirement income, consider the advantages and disadvantages of such a move.

“Using home equity to fund retirement can increase cash flow and create financial breathing room, for sure. Its biggest benefit is that you can stay in the home you love, keep your routine and neighbors, and avoid any major disruptions to your everyday,” Osher says. “It does, however, also mean taking on new financial burdens, and if you can’t keep up with payments, there’s always the risk of foreclosure.”

Pros

• Can increase cash flow

• Stay in your home

Cons

• New financial burdens

• Risk of foreclosure if you can’t keep up with payments

Financial Considerations and Risks

Tapping into your home’s equity may be convenient, but it isn’t free. There are interest rates and fees to consider. Your home is a valuable asset, and you make it less valuable when you use up some of its equity. Before deciding to use your home’s equity for short-term cash flow, carefully consider your long-term financial plans as well.

You will also need to be careful with the amount of equity that you tap from your home.

“If you’re especially responsible with money, [tapping home equity] could be a solid option for you, but if you struggle to stay on top of your finances, taking out new debt may be more trouble than it’s worth,” Osher says.

Alternative Strategies for Generating Retirement Income

There are other ways to use your home to increase your retirement income, such as renting out a room. If you have a larger home, you could even convert the lower level into an apartment. Monthly rent checks will go a long way in boosting your retirement income.

“Renting out a guest suite, starting a short-term rental, or investing in income-generating assets with pulled equity are all creative ways I’ve seen retirees generate income while keeping their home intact,” says Adriana Trigg, owner of Legionary REI.

Retirees can also rent out other parts of their home for some additional income.

“Other parts of the home, such as garages, driveways, basements, and attics, can be rented out for storage or parking spaces,” says Ryan Barone, chief executive officer of RentRedi. “Retirees can also convert parts of their home into spaces that can be used for social gatherings to fulfill certain hobbies and activities.”

Those hobbies could be everything from arts and crafts and sewing to yoga classes.

“This will also generate some extra income while helping retirees remain active and connected to their communities,” Barone says.

The Bottom Line

Tapping into your home’s equity is one way to increase your retirement income, pay for unexpected expenses, and stay in your home. The simplest way to tap into your home’s equity is with a HELOC. It works like a credit card, and no interest gets applied to any of the unused credit line.

A reverse mortgage is another way to convert equity in your home into cash, but you’ll need to be 62 or older to qualify. Reverse mortgages also come with high fees.

A cash-out refinance gives you a new, bigger mortgage and access to cash. But you will also have larger mortgage payments.

Your home is a valuable asset, but tapping into its equity may make it less valuable, so carefully weigh the pros and cons of doing so. Receiving the cash can be helpful, but interest and fees accumulate over time, and your home, which you may intend to leave to heirs, could end up being worth less.