Smarter Ways for Seniors to Tap Home Equity
For older homeowners in need of extra cash, a reverse mortgage can seem like an easy solution. There’s no minimum credit score required, and as long as you stay current with your insurance, home maintenance, and property taxes, you don’t have to make any payments until you move out, sell your home, or pass away. However, this option comes with strict qualifications. To get a government-backed home equity conversion mortgage (HECM), the most common type of reverse mortgage, you must be at least 62 years old and have at least 50% equity in your home.
There are serious risks too. Once you no longer live in the home or if you fall behind on maintenance or taxes, the entire loan and accumulated interest become due immediately. That can leave your heirs scrambling to resolve the debt, sell the home quickly, or even face foreclosure. Before you commit to a reverse mortgage, it’s worth exploring safer or more flexible alternatives.
A home equity line of credit, or HELOC, allows you to borrow against your home’s value much like a reverse mortgage, but without the age restriction. It functions as a revolving line of credit, meaning you can withdraw money as needed over a draw period, usually ten years. During that time, you only pay interest on what you borrow. After the draw period ends, you begin repaying the principal and interest over a fixed term, often 20 years. If you use the funds for home improvements, some of the interest may be tax-deductible. This option generally requires a credit score of 620 or higher and at least 15–20% equity in the home.
A home equity loan is another option that gives you a lump sum up front, which you repay in fixed monthly payments over a term of five to thirty years. Like HELOCs, these loans require a decent credit score and a moderate amount of equity in your home. The main difference is that you get all the funds at once, which might make sense for large, one-time expenses like paying off debt or funding a major renovation. The interest may also be partially tax-deductible if used for home improvement.
For those needing a larger cash payout, a cash-out refinance might be the right move. This replaces your existing mortgage with a new, larger loan and pays you the difference in cash. You’ll still make monthly payments, but now on a higher balance. For example, if your home is worth $400,000 and you owe $100,000, you could refinance into a loan for $320,000, using the extra $220,000 however you choose. This strategy works best when you can secure a low interest rate and want to extend your loan term. Like the previous options, you’ll need decent credit and enough equity to qualify.
Another increasingly popular method is home equity sharing. Instead of borrowing money, you sell a percentage of your home’s future value to an investor in exchange for a cash payment now. When you sell your home or reach the end of the contract term, you repay the investor based on the home’s value at that time. These agreements are more flexible than traditional loans and often available to homeowners with lower credit scores. They require less income documentation and no monthly payments, though you are effectively giving up part of your future home appreciation.
Finally, if you’re open to a lifestyle change, downsizing could be the simplest and most financially effective solution. With home equity averaging more than $300,000 nationally, selling your current home and moving to a smaller or less expensive property could free up significant cash. You might also benefit from reduced living expenses, including lower property taxes, insurance premiums, and maintenance costs, especially if you relocate to a more affordable area.
Reverse mortgages may seem attractive at first glance, but they come with strings attached. Whether it’s a HELOC, a home equity loan, refinancing, equity sharing, or simply downsizing, there are multiple ways for older homeowners to access their home’s value with more flexibility and fewer long-term risks.