Should retirees use their home equity?
Home equity is, as Steve Azoury, ChFC® and owner of Azoury Financial in Troy, Michigan, puts it, "the paid off portion of your home," or the portion of your home that you own. Since it's something you own, it's something you can use.
Many borrow against their home's equity as "it normally costs less to use with the house being the collateral for the loan," Azoury says.
But retirees have things to consider before they tap into their home's equity. With a fixed income and an estate to think about, is it wise for a retiree to borrow against their home equity?
Take advantage of your home's equity now.
Should retirees use their home equity?
In some cases, it does make sense for retirees to use their home equity. Expenses pop up in retirement, and it's nice to have somewhere to turn when you need a financial pick-me-up.
Your home's equity might be the right place to turn. Home equity loans and HELOCs come with significantly lower interest rates than credit cards and personal loans.
"If the house being paid off is not the goal of the retiree, then there should be no issue with one using the equity." Home equity is "easy to use and can be put back, if not needed," Azoury says.
Use your home equity to make your golden years more golden.
Three reasons retirees should use their home equity
Here are three times retirees may want to consider using their home's equity:
To cover unexpected expenses
Financial surprises happen. And when they do, they can be quite costly. If your roof needs to be replaced, you can expect to pay an average of $9,201 to replace it, according to Angi. And, even common car repairs, with an average cost of $500 to $600, can lead to financial strain when you're on a fixed income.
You can use your home equity to cover expenses like these and countless other potential financial surprises. When you do, you spread the cost of the unexpected expense over a period of time, making it easier to stomach.
To supplement retirement income
If you find yourself in a financial bind more often than not, your home's equity could help you find financial stability. "Equity loan can be used to supplement retirement income and the loan would be paid off when the house is sold," Azoury says.
You may have a substantial amount of equity in your home. If that's the case, and you're not worried about paying your home off throughout your retirement, you could use that equity to help make your golden years more comfortable.
To pay off high-interest debt
High-interest debt like credit cards and personal loans are often a major hurdle in retirement. Dawn-Marie Joseph, founder of Estate Planning & Preservation in Williamston, Michigan, says, "if at all possible, pay off your credit card debt as soon as you can."
"One reason is because, in the big scheme of your budget, you cannot afford not to," Joseph says. "The interest rate will eat you alive and put you in such a bad place."
The problem is that, as a retiree with a fixed income, it may not be possible to pay off your high-interest debt in a reasonable amount of time. That's where a home equity loan can be handy.
That said, if you use your home's equity to pay off your credit cards, you're rolling one debt into another. On the other hand, home equity loans come with significantly lower interest rates and a clear path to payoff, so they could make more sense.
Use your home's equity to get rid of costly high interest debt now.
When to think twice about using your home equity
Tapping into home equity isn't a wise move for everyone, however. You may want to think twice if:
- You can't afford to pay the loan back: If you're not certain you'll be able to make your home equity loan payments, don't take the loan out.
- You want to pay off your home: If one of your goals in retirement is to pay off your home so you can leave it for your heirs, a home equity loan isn't a good idea. After all, this will make it more difficult to pay your home off.
The bottom line
It's important to think about your goals before you use your home's equity in your golden years. If you're not concerned with paying your home off and are confident you can afford the payments, home equity loans can help you cover emergency expenses, supplement income, pay off high-interest debt and more.
