A debt-free retirement has been the ideal scenario for so long that older adults often overlook a valuable financial resource: their home. Collectively, homeowners age 62 and older have a record $6.5 trillion of “tappable” equity, according to data analytics firm Black Knight. Individually, home equity accounts for more than a quarter to almost half of the median net worth of retirees, depending on age, according to the Federal Reserve Bank of Philadelphia.
Many financial planners believe tapping that wealth in retirement or just before makes sense if done wisely for the right reasons. For instance, the money can be used for some laudable goals: to pay off higher-priced credit card debt, remodel a home with features to help you age in place, delay taking Social Security until you qualify for the maximum payout, buy long-term care insurance or pay the tax bill for a Roth conversion. Your home’s equity might be the lifeline you need to avoid drawing from your investments during a market downturn or taking on more portfolio risk to make up for any investing shortfalls.
The ultimate way to cash in on that equity is to sell your home and downsize or rent the next one. But most retirees don’t want to move, and even if they do, downsizing in today’s heated housing market presents its own challenges.
The alternative is to borrow from your home equity with your home as collateral. You can refinance an existing mortgage and take cash out, borrow with a home equity loan or line of credit, or apply for a reverse mortgage. Each option comes with opportunities, limits, and costs.