Home equity options for seniors

While many people consider 401(k)s, IRAs and Social Security when planning for their next phase of life, some seniors who are longtime homeowners may be able to tap into a hidden retirement resource: the equity in their homes.

Cash-out refinance

A cash-out refinancecash-out-refinance-hl000061 is one of the common ways to access equity captured in a home. Typically, this mortgage refinancing option replaces the existing mortgage with a new, larger one and gives the leftover portion of the equity to the homeowner in cash.

Cash-out refinances can generally be used in many ways, from consolidating debtdebt-consolidation-hl000039 to financing large purchases. It is likely to have lower rates than some other options (such as a home equity loan), although it has its own caveats to consider. For example, a cash-out refinance could possibly result in higher monthly mortgage payments. It also uses property as collateral, which puts the house at risk if the borrower has problems repaying the loan.

Home equity loan

A home equity loan is another way retirees might use their property to receive a significant one-time payment for their expenses. Unlike a cash-out refinance, a home equity loan does not replace an existing mortgage; rather a second loan is added on top of the existing one, which may result in higher interest rates.

This type of loan requires significant equity built up over years, a good credit history and a low debt-to-income (DTI) ratio. After getting approved, a borrower receives the cash and then pays off the loan in monthly installments with interest. This type of loan also uses property as collateral and may come with closing costs and other fees, which are essential to consider when weighing the pros and cons of this option. Note that Chase does not currently offer home equity loans.

Downsizing

Downsizing may be different from what some people imagine when thinking about using their equity for retirement. However, it could be a practical option when considering extra cash through the home.

Selling a house may come with expenses and is likely to require significant time and effort. What's more, it may be emotionally difficult for some to say goodbye to the home they spent many years in. That being said, some retirees may consider selling as a way to start a new chapter of their lives and benefit from the decreased upkeep of the big house.

Pros and cons of tapping into your home equity during retirement

Tapping into equity is not a decision to be treated lightly. Here are some pros and cons of using your home equity during retirement:

Advantages of using your home equity

• Possibility to secure additional cash for larger expenses or as a supplement to monthly income.
• A variety of options to choose from, which may be suitable for many types of borrowers.
• Most of these loans allow for flexible spending and don't dictate how funds can or cannot be used.

Disadvantages of using your home equity

• Using the home as collateral puts it at risk if the borrower has problems repaying the loan.
• Many options involve accumulating additional debt that will need to be repaid later by the borrower or their heirs.
• Most of the loans come with additional fees and costs.

In summary

Senior homeowners may have options when tapping into their home equity, with the main ones being cash-out refinance and home equity loans. While Chase does not currently offer home equity loans, a qualified home lending advisor can provide tailored guidance on which options might make sense for you.