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5 strategic ways to use a home equity loan during retirement

Senior couple puts the coin into the piggybank
Your home's equity can be a great source of funds during retirement, but it's important to use the money strategically or you could end up in financial trouble. Getty Images

Retirement is a well-deserved phase of life, and for many seniors, homeownership represents a significant component of their net worth. After all, the uptick in home values over the last few years — which resulted, in large part, from a mix of low-interest rates, limited home inventory and surging home prices during the pandemic — has left the average homeowner with nearly $200,000 in tappable home equity. And if you're a retiree who owns your home outright — or are close to paying it off — you may have substantially more home equity available to you. 

But what can you do with your home's equity? Well, one financial tool that can be strategically employed during retirement is a home equity loan. When you borrow against your home's equity with a home equity loan, you're borrowing money against the portion of the home you've paid off. And, in many cases, you're borrowing that money at a much lower rate than you'd get with a credit card or personal loan.

And, by leveraging the equity in your home during your retirement, you can use the funds to enhance your retirement lifestyle or manage unexpected expenses, or for any other number of uses. But as with any type of financial tool, there are some smart ways — and some not-so-great ways — to use your home's equity. So what are some of the most strategic uses of a home equity loan when you're retired? That's what we will break down below.

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5 strategic ways to use a home equity loan during retirement

A home equity loan can come in handy during retirement for a few different reasons, including:

To supplement your income

For many seniors, one of the primary challenges during retirement is managing a fixed income. Social Security and pension payments may not always be sufficient to cover the desired lifestyle, travel plans or unforeseen medical expenses. But using a home equity loan to supplement your income can provide a reliable source of funds. 

And, you have a couple of options to consider when tapping into your home equity. Depending on your needs and goals, you can opt for either a home equity line of credit (HELOC) or a home equity loan to receive a lump sum of cash. Either option can be especially beneficial for retirees who own their homes outright and want to unlock the value tied up in their property.

However, it's crucial to carefully plan and assess your ability to repay the loan before borrowing, as failing to do so could put your home at risk. You should also be sure to determine the appropriate amount to borrow and understand the potential impact on your overall financial picture.

Learn about the top home equity loan rates you could get here.

To renovate or retrofit your home

As you age, it's common to face mobility and safety challenges in your home. But investing in home renovations or retrofitting can make your living space more comfortable and accessible during retirement. Whether it's adding a ramp, widening doorways, installing grab bars or renovating the bathroom, these improvements can significantly enhance your quality of life.

Using a home equity loan for these modifications can be a wise choice, as it allows you to age in place while maintaining the value of your property. Just be sure to prioritize projects that address your specific needs and align with your long-term goals. Consulting with a contractor and an occupational therapist can help you identify the most beneficial modifications for your unique situation.

To consolidate high-interest debt

Some retirees may find themselves burdened with high-interest debt from credit cards, medical bills or other loans. Consolidating these debts with a home equity loan can be a strategic move to simplify your finances and reduce overall interest payments. That's because home equity loans typically offer lower interest rates compared to credit cards or personal loans, potentially saving you money in the long run.

However, it's crucial to approach debt consolidation with caution and discipline. Once you've paid off your high-interest debts, you should try to avoid accumulating new ones and focus on managing your finances prudently. It may help to consult with a financial advisor to create a plan that aligns with your retirement goals and ensures you can comfortably repay the home equity loan.

To fund education or offer assistance to family

Many retirees want to help support their children or grandchildren in achieving their educational goals. And, a home equity loan can be a viable option to fund education expenses, whether it's covering tuition fees, helping with student loans or assisting in purchasing a home. This strategic use of home equity can contribute to your family's financial well-being and create a lasting legacy.

Before proceeding, though, be sure to discuss your intentions with family members and establish clear expectations regarding repayment or any potential impact on their financial independence. This ensures everyone involved is on the same page and avoids any misunderstandings in the future.

To diversify your investments

Smart retirement planning includes managing and optimizing your investment portfolio. And, using a home equity loan to diversify your investments with stocks, bonds or other income-generating assets can be a strategic move, especially if you anticipate higher returns than the interest rate you're paying on the loan. 

However, this strategy involves risks, and market fluctuations can impact your returns. It's crucial to thoroughly research and assess potential investments, considering your risk tolerance and financial goals. Diversification should also complement your overall retirement strategy rather than introduce unnecessary financial instability.

The bottom line

A home equity loan can be a valuable tool for retirees when used strategically. Whether you're looking to supplement your income, make home improvements, consolidate debt, support family members or diversify investments, careful planning is essential. But by leveraging the equity in your home wisely, you can enhance your retirement years and potentially ensure a more financially secure future.

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