Should seniors use their home equity to pay bills? What experts say
The red-hot housing market of the last few years has sent home prices upward. For homeowners, that's been great, leading to sizable gains in home equity.
In fact, the average homeowner is currently sitting on about $300,000 in home equity right now. That's equity you can tap with a home equity loan, home equity line of credit (HELOC) or reverse mortgage and use to make repairs to your home, pay off debt, cover your child's tuition or achieve any other financial goal you might have.
Some homeowners — particularly seniors on limited incomes — might even consider using their home equity to pay household bills. Is this a smart move, though?
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Should seniors use their home equity to pay bills? What experts say
Here's what experts have to say about whether it's a good idea for seniors to use their home equity to pay their bills.
Yes, if you're willing to sell your house
If you really want to use your home equity in the best way possible, selling the home and downsizing would be the way to go, says Jay Garvens, business development manager at Churchill Mortgage. This would allow you to cash in on that equity without adding extra debt to your life — and without incurring any interest or fees.
"Simply sell the house," Garvens says. "Take the cash, and move to a more affordable community. You would then have enough money left over to pay your bills for the remainder of your retirement years."
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No, if you're using a home equity loan or HELOC
If selling your home isn't an option, you still may want to steer clear of using your equity — at least with a home equity loan or HELOC. These will only add an extra monthly payment to the problem, as well as interest costs. It can also start a cycle of debt that can be hard to get out of.
"Generally speaking, it's not advisable to pay any daily bills on borrowed money," Garvens says. "When interest rates are high, as you can end up paying two to three times the cost of your household bills when you add in simple or compounding interest."
It can also mean you're taking away the opportunity to use equity later on — for your grandkids or that Florida summer home you've been eyeing, for example. To top it off, it's only a short-term strategy, at least if paying your bills is truly a problem.
Bills never stop, but home equity has a limit," Mark Charnet, financial advisor and founder of the American Prosperity Group, says.
Maybe, if you're using a reverse mortgage
Reverse mortgages are a slightly different story, as they let you tap your equity without taking on a monthly payment. Instead, the lender makes payments to you — out of your equity, which you can then use how you like. You pay back the money if you sell your house, move out, or pass away.
Still, reverse mortgages do come with interest charges, and they can deplete the inheritance you're able to leave behind for loved ones. For this reason, it's typically best to exhaust savings accounts, investments, and other resources before going this route for daily bill paying.
"If there are no other assets to access, a reverse mortgage can be a way to maintain retirement," says David Orsolino, financial advisor at Strategies for Wealth. "This will allow for tax-free income and allow you to remain in the home."
Maybe, if it's an emergency
If you're truly in an emergency and have no other way to pay your bills, it might be OK to use your home equity to cover them. Just make sure it's your last resort after exhausting all other avenues (including considering selling the property), Orsolino says.
"Home equity should be the last — or one of the last assets — to be used for retirement income," Orsolino says. "It can be used as a backstop — as the last alternative. I would not recommend it for basic monthly expenses, at least not if there are other assets."
The bottom line
If you're having trouble paying bills regularly, you may want to speak to a financial planner or credit counselor. They can help you get on a budget, reduce costs, and ensure you stay on top of household expenses. They may also be able to recommend alternative ways to pay your bills without draining your home equity.
