4 ways to use your home equity to prepare for retirement this May

Your home's equity could help bulk up your retirement savings, but you'll need to choose the right option. Getty Images

For Americans nearing retirement, these can be stressful times. Prices are rising, interest rates are high and inflation is still not at the level the Federal Reserve has been aiming at for years.

Fortunately, for those who are nearing retirement age and own a home, there is a silver lining: High property values. These not only mean more profits once it's time to sell, but they also give you access to rising amounts of equity. 

That home equity — of which the average homeowner has about $313,000 worth of currently — can be used strategically as you enter retirement. But how should you tap into your home equity if you're trying to prepare for retirement this May? 

Learn more about your home equity tapping options now.

4 ways to use your home equity to prepare for retirement this May

"Think of your home equity like a choose-your-own-adventure book: you can shrink your footprint and pocket the difference, borrow strategically, or even turn your walls into a monthly paycheck," says Matthew Argyle, a certified financial planner at Encore Retirement Planning. "Just don't wait until you're out of options to flip the page."

Are you a homeowner who's preparing for retirement? Here's how experts say you can use your home equity to prepare.

Take out a HELOC as a financial safety net

One option is to open a home equity line of credit (HELOC), and turn your home equity into cash. These tools allow you to borrow as needed over a long period (usually 10 years) and then pay back what's owed over the next couple of decades. 

HELOCs can be used as a safety net for emergencies and can help you avoid using credit cards in retirement, which typically have much higher interest rates (the average HELOC is below 8% right now; credit cards are nearing 22%). They also typically have low upfront costs compared to other borrowing options.

"Most banks charge a nominal fee, if they charge one at all," says Patti Brennan, president and CEO of Key Financial. "And you don't make payments unless you tap into it."

Just make sure you have a plan for paying off your HELOC (if you draw from it), as it comes with a variable interest rate, which can rise over time. 

"We recommend to our clients a trigger date — that we are going to pay off this HELOC by X date, and look at the best-case, expected, and worst-case scenarios of where rates could go during your loan duration and by that trigger date," says Eric Elkins, CEO of Double E Financial Solutions. "If someone doesn't feel extremely confident they can handle worst case scenario, then we don't recommend taking a HELOC."

If you are considering a HELOC, you should apply early, before you officially enter retirement. "They're harder to qualify for once your income drops," Argyle says. 

Compare today's top HELOC options and find the right one for you.

Downsize and invest or pocket the proceeds

If you're willing to move, you can consider selling your house, downsizing and then taking the profits. If you've had your home for a while, it's likely its value has jumped quite a bit, so the profits could be substantial.

"We have seen retirees sell their home, invest their equity, and take an income stream from the equity," Elkins says. "They will either rent or downsize."

Be careful if you're thinking about investing your proceeds, as you'll want to be sure the investment will net you more than your home's rising property value would have. 

Refinance your mortgage and take cash out

Depending on the terms of your current mortgage, refinancing your mortgage loan and taking cash out of your home equity may be a good option. Cash-out refinancing replaces your existing mortgage loan with a new one, complete with a new term and rate.  

This can help in a few ways: First, you can spread out your mortgage balance over a longer period of time, potentially lowering your mortgage payments in retirement. It also gives you the chance to lower your interest rate (depending on market conditions) and gives you access to a lump sum of cash you can use however you like. 

Plus, cash-out refinances often come with fixed interest rates, which are "the best route" for most retirees, says Mason Whitehead, producing branch manager at Churchill Mortgage in Dallas. 

Just make sure to shop around for your loan, as fees, terms and offerings can vary quite a bit from one company to the next.

"Some programs and states allow you to take out more than 80% of the equity in the home, but those programs typically also have higher fees and mortgage insurance costs that need to be taken into account," Whitehead says. 

Take out a reverse mortgage to create steady income

A reverse mortgage is another option. With this, the lender pays you out of your home equity — monthly, in a lump sum, or as a line of credit. You must be 62 or older to qualify for most reverse mortgages. 

If you're "committed to aging in place," Argyle says, "it can unlock more dignity and breathing room than any portfolio rebalancing ever could."

Be aware of the drawbacks of reverse mortgages, though. While they can offer regular income in retirement, they also require you to cover certain costs or risk foreclosure. They can also deplete your equity fast and leave little left for your heirs.

"It's not just the payments to you that reduce the equity in your home, it's also the interest and fees," says Mary Clements Evans, a certified financial planner at Evans Wealth Strategies. "These can add up quickly. Another problem is you must continue to pay your property taxes, your homeowners insurance, and any maintenance costs. These are big expenses. If you fall behind, the lender will start foreclosure proceedings. Then the retiree has nothing."

Be warned, though: In today's high-rate environment, reverse mortgages don't offer as much potential funding as some retirees may need. These may be better options when interest rates start to fall, Whitehead says.

"In the current interest rate environment, the amount of equity you can tap into is lower," Whitehead says. "This is because they are projecting the mortgage balance to go up over the remaining 10, 20 or 30 years you are in the home, and the models need to account for that to ensure the final mortgage balance is not higher than the future estimated value of the home. When rates go down, I believe you will see a large uptick in reverse mortgages."

The bottom line

You might also consider renting out all or part of your house to generate income in retirement, or you can tap your home equity to make necessary repairs — before you no longer have the cash to do so.

"Home maintenance can be very expensive and very difficult to pay for when on a limited retirement income," Evans says. "It's a great idea before going into retirement to make sure that your house is up to date."

Whatever you do, if you're planning for retirement, make sure your home equity is a part of the discussion. And if you need help, talk to a financial advisor. They can help you use your assets strategically to meet your retirement goals.

"In many retirement plans, home equity just sits there — quietly accumulating value while retirees worry about market swings and rising costs," Argyle says. "But it doesn't have to be passive. Whether you downsize, borrow against it, or simply know it's there as a fallback, equity can help absorb shocks, smooth income, or extend portfolio longevity. It's not about tapping it recklessly — it's about recognizing that you have options."

Aly J Yale

Aly J. Yale is a contributing writer for the Managing Your Money section for CBSNews.com, covering various personal finance topics, including investing, homebuying, loans and more.