Over the past few years, home equity levels have increased substantially nationwide. In fact, as of the first quarter of 2024, the average homeowner had seen their equity increase by $28,000 year-over-year, according data from CoreLogic. That uptick in home equity began in 2020 and was driven, in large part, by a mix of low rates, low for-sale home inventory and high demand by buyers. Since then, the average price of a home has increased over 50% — climbing from an average of $317,000 in the second quarter of 2020 to $480,000 in the first quarter of 2024.

That has left the average homeowner with about $300,000 in home equity. And, that equity can be borrowed against, typically at a low rate, for a wide range of uses — including debt consolidation and home renovations or repairs. Borrowers also have a few different home equity lending options to choose from, including home equity loans and home equity lines of credit (HELOCs)

While home renovations or consolidating debt can be smart ways to use your equity, so can using it to help fund your retirement. For example, you could tap into your equity to help cover retirement expenses, such as unexpected medical bills. But what is the best way to use home equity to fund your retirement — and what are some of the pros and cons of each option? Here’s what to know.

The best ways to use home equity to fund retirement

Here are some of the best options you have if you want to use your home equity to fund retirement.

Opt for a home equity loan or HELOC

home equity loan could provide a lump sum of cash that you can use to cover retirement expenses. Or, you could tap your home’s  equity via a HELOC, which works as a line of credit that you can borrow from as necessary during the draw period.

However, it’s important to consider the potential drawbacks of each option. For instance, though home equity loans and HELOCs often have lower interest rates than other products, like credit cards and personal loans, it might be tough to repay the loan, including interest, especially if you’re on a fixed income. 

As a result, it might be best to use these funding options as a short-term solution.

“Using a home equity loan or line of credit to fund your retirement is not sustainable over a long period,” says Stephen Kates, CFP and principal financial analyst at Annuity.org. 

Kates says that while it’s common to use these borrowing options for home renovations and repairs or unexpected expenses, the downside is that they don’t produce a continuous and sustainable income source like some other home equity products. 

Consider a reverse mortgage to boost income

reverse mortgage may be the best option if your goal is to boost your cash flow. Unlike a home equity loan or HELOC, a reverse mortgage doesn’t require you to repay the loan with monthly payments. Rather, you repay the loan with interest when you sell your home or die.

In turn, this option is often best for those who don’t have children or heirs they want to leave their home to, says Gloria Cisneros, a certified financial planner at wealth management firm LourdMurray. Or, it could make sense to use a reverse mortgage if you have other assets set aside for your heirs, according to Cisneros.

However, if your need for funds is temporary and you expect additional cash to come in soon, taking out a reverse mortgage to fund retirement might not make sense, Cisneros says. In this scenario, taking out a HELOC or home equity loan could be a better solution.

Your home also needs to be paid off or have a low balance to qualify for a reverse mortgage, Cisneros adds. In addition, you generally have to be at least 62 years old, though some lenders have lower minimum age requirements for non-government-insured reverse mortgages.

You should also consider whether you can afford the upkeep of your current home if you’re going to use a reverse mortgage loan. After all, one of the requirements of a reverse mortgage is that the homeowners continue to pay property taxes and insurance and keep the property in good condition. 

Downsize to turn your equity into cash without borrowing

Because of the risks of taking out a loan to fund your retirement, Michael Collins, CFA and founder of wealth management firm WinCap Financial, recommends downsizing as an alternative solution.

“If your current home is larger than you need in retirement, selling it and downsizing could provide you with extra cash to fund retirement expenses without taking out a loan,” says Collins.

This could be the best option to fund retirement, experts say, especially if you can purchase a smaller home in cash. 

After all, in this scenario, you could avoid paying interest at today’s higher rates, says Donald LaGrange, CFP and wealth advisor at Murphy & Sylvest Wealth Management.

Another option for downsizing is selling your home and moving to a retirement community. LaGrange says these communities are often all-inclusive, so it’s possible in some cases to save money by taking advantage of all of the amenities offered. Common amenities include entertainment, housekeeping and private dining and laundry service.

Other alternatives for funding retirement

Before you take out a loan to fund retirement, be sure to consider all of your options — including those outside of borrowing from your home. For example, you could consider returning to part- or full-time work, says Kates. Getting a job can supplement your income and reduce the need for loans or withdrawals from your savings, Collins says.

In addition, you may want to look into government programs like Social Security and Medicare, Collins says, as they can provide certain types of financial support during retirement.

The bottom line

Taking out a home equity loan or HELOC to fund retirement could be beneficial as a short-term solution. That said, experts warn that it only makes sense if you can comfortably afford to repay the loan, as defaulting has negative consequences like a lender foreclosing on your home. Ultimately, though, the best way to use home equity to fund retirement depends on your financial situation and goals. Experts say offering specific guidance can be challenging because each situation may be different. As a result, it’s typically best to contact a financial advisor so they can review your complete financial picture before making a recommendation.

By Jerry Brown