For many older homeowners, their home represents one of their largest financial assets. Years of mortgage payments combined with rising home values have left many homeowners with substantial equity — but accessing that equity isn’t always straightforward.

If you need additional flexibility in retirement, there are several ways to put home equity to work. A reverse mortgage, a home equity line of credit (HELOC), and selling or downsizing can all accomplish that in different ways.

Understanding those differences is important before deciding which approach makes sense for you.

Reverse Mortgage

A reverse mortgage allows homeowners age 62 and older to access a portion of their home’s equity while continuing to own and live in the home.

The most common type is the FHA insured Home Equity Conversion Mortgage (HECM).

Unlike a traditional mortgage or HELOC, a reverse mortgage does not require monthly principal and interest payments. Depending on the loan and circumstances, proceeds may be available through a line of credit, monthly advances, a lump sum or a combination of options.

The loan generally becomes due when the last borrower permanently leaves the home, sells it or passes away.

The homeowner remains responsible for property taxes, homeowners insurance, maintaining the property and meeting the other requirements of the loan.

For someone who wants to remain in their home and access equity without adding a required monthly mortgage payment, a reverse mortgage may be worth considering.

Home Equity Line of Credit (HELOC)

A HELOC also allows you to borrow against the equity in your home, but it works very differently.

A HELOC is generally a revolving line of credit. You can borrow funds as needed up to an approved limit and repay what you’ve borrowed.

Unlike a reverse mortgage, HELOCs require payments. They also commonly have variable interest rates, which means payments and borrowing costs can change over time.

Qualifying typically depends on factors such as income, credit and the amount of equity in the home.

For homeowners who have sufficient retirement income to comfortably make the required payments, a HELOC can provide flexible access to home equity without selling the house.

Downsizing

Of course, you don’t have to borrow against your home at all.

Selling and moving to a less expensive home can convert a much larger portion of your equity into available cash. It may also reduce property taxes, insurance, maintenance and other housing expenses.

But downsizing isn’t automatically the less expensive option.

Selling a home involves transaction and moving costs, and purchasing another home in today’s market can be expensive. There are also nonfinancial considerations. Some homeowners simply don’t want to leave a longtime home, neighborhood or community.

For those who do want to move, a Reverse Mortgage for Purchase is another possibility. It allows eligible homeowners age 62 or older to purchase a new primary residence using a reverse mortgage, combining a down payment with reverse mortgage proceeds without taking on required monthly principal and interest payments.

Which Option Makes Sense?

There isn’t one answer that’s right for every homeowner.

A HELOC may make sense if you want access to equity and are comfortable taking on monthly payments.

Downsizing may be appropriate if you’re ready to move and want to convert more of your home’s value into available assets.

A reverse mortgage may be worth exploring if you want to remain in your home, access some of the equity you’ve accumulated and avoid adding a required monthly principal and interest payment.

The decision should also take into account how long you plan to remain in the home, your income and expenses, interest rates and loan costs, your plans for the property, and your overall retirement strategy.

Home equity can be an important part of retirement planning, but how you access it matters. Before making a decision, take the time to compare the costs, requirements and long-term effects of each option and consider discussing them with your financial advisor and an experienced reverse mortgage professional.

Jan and Kelsey are Reverse Mortgage Specialists serving the Erie, Dacono, Fort Collins, Loveland, Greeley, Longmont, Boulder and other Front Range areas of Colorado, as well as the Cheyenne and Laramie communities of Wyoming.  Contact Jan and Kelsey to learn if a reverse mortgage is right for you.