Selling/Downsizing: Over time, as your home's value increases, you may find that a larger percentage of your net worth is tied up in your home.  Houses that may have cost $250,000 at purchase 20 years ago may be worth $1,000,000 in today’s dollars.  The 4-bedroom home that you needed when the children were little may be oversized now that you are empty nesters.  Larger homes can have significant carrying costs (maintenance, utilities, taxes), which can become a drain for retirees.  In our practice, we have seen clients who are “house poor” – spending excessive amounts of money maintaining and paying for a home they no longer need.  The solution: sell and downsize.  A right-sized home can reduce annual expenses and allow you to add cash to your portfolio.  The cons: real estate fees are generally 6% of the sales price, there are moving expenses, and you may have costs to get your home ready to market.

Home Equity Loan: If you have sufficient equity in your house, you may be eligible for a home equity loan.  Traditional home equity loans are second mortgages on your property and are issued for a fixed cash amount.  They are best used for home improvement projects that increase the property's value: kitchen renovations, adding a bathroom, improving energy efficiency, or adding a deck.  Homeowners also use them to fund a specific immediate need, such as large medical expenses or college costs.  The cons: just like a mortgage, there are closing costs, and the interest rate may be higher than a first mortgage.  Payments on the loan’s full amortized amount are due when the funds are disbursed, so your monthly debt increases.    

Home Equity Line of Credit (HELOC): One of the most flexible options.  A Home Equity Line of Credit essentially gives you a checkbook to tap into the equity in your home.  Of course, you must have sufficient equity, and the amount is capped.  However, HELOCs can provide liquidity and access to capital when needed, and closing costs are minimal.  Suddenly need a roof repair?  You can pay for it with a HELOC check.  The terms of repayment are generous – often interest-only for a period of time (10 years is common) before the principal amount must be repaid. Pandemic note- most banks have raised their requirements for HELOCs, and they may currently be difficult to get.  The cons: the balance can build over time if used as an emergency fund, and the payments can be steep when you enter the repayment period.  

Cash-Out Refinancing: Under this scenario, you pay off your first mortgage (presumably at a higher interest rate) and get additional cash from the equity in your home.  Cash-out refinancing can be used to purchase a second home or pay off higher-interest-rate debt, such as credit card or student loans.  The cons: you are reducing your home's equity and increasing your monthly debt payments.  If used to pay for a depreciable item (like a car) or to fund recreational expenses (like a vacation), then your net worth will decline. 

This is a new mortgage, and a new interest rate will replace the interest rate you had. If rates are higher than your current rate, this likely isn’t your best option. A home equity loan or HELOC will allow you to keep your lower rate on your mortgage while still tapping equity. 

Reverse Mortgage: Also known as a Home Equity Conversion Mortgage (HECM), this option is available to those over 62 who reside in their home as a primary residence and have significant equity in the property.  Unlike the other types of loans described, the HECM allows the homeowner to withdraw a portion of the equity with no repayment until they die, move, or sell their home.  Reverse mortgages work best for clients who want to stay in their homes, have substantial home equity, but are experiencing cash flow issues in retirement.  The proceeds can be used for living expenses, debt repayment, healthcare, and more.  The amount that can be borrowed varies with the homeowner’s age and the house’s value.  Generally, the older you are, the lower the interest rate and the more your property is worth, the larger the loan’s principal limit.  The cons: the homeowner must maintain the house and continue paying property taxes and insurance.  The fees and closing costs are extremely high, and interest continues to accrue over the life of the loan, eating into the home's remaining equity.  

Although many options exist, we suggest that all clients proceed with caution when using their home equity to meet financial obligations.  Except for the outright sale of the home, in all the other options discussed, you are pledging it as collateral to access cash.  Be sure that you understand the risks.