4 Reasons to Use a Home Equity Credit Line in Retirement

You don’t have to put a “for sale” sign in front of your home to access its value in retirement.

Kallee Feuz Jan 22, 2021

You’ve spent years building equity in your home. Now that your working years are behind you, you don’t have to put out a “for sale” sign to access its value. 

A home equity credit line lets you borrow against the equity you already have. Once established, the revolving account lets you withdraw what you need up to a certain amount, pay down the principal, then withdraw again. They provide a ready source of cash, which can be used for everything from home improvements to medical expenses and financial emergencies.

Should you consider a home equity credit line as part of your financial strategy in retirement?

That depends on a variety of factors, including how you plan to use the funds and the tax implications. As with all loan decisions, homeowners should compare interest rates, loan terms and associated fees and conditions. It’s best to talk to your banker for details.

Because a home equity credit line is loan secured by your home, the interest rate is often lower than with other types of debt. It gives added flexibility to consumers who do not know the final price of their project, such as a remodeling job that may come with hidden costs.

Following are some reasons to consider taking advantage of a home equity credit line.

Reason #1 To Use a Home Equity Credit Line in Retirement: Possible tax savings

When planning for retirement, many people put together a basic budget and forget about expenses like buying cars, which may only occur every five or 10 years, says Marie Martinez, a Zions Bank Executive Banking relationship manager in Farmington, Utah.

“If most of your money is held inside retirement accounts like certain types of IRAs and 401(k)s, then each time you take a withdrawal, that amount will be included as taxable income on your tax return that calendar year,” Martinez says.  “If you take a large withdrawal in one year to fund a big expense, it may push you into the next higher tax bracket.”

A home equity credit line provides an alternative to taking a lump sum out of a tax-deferred account, allowing you to repay the loan gradually over time without impacting your tax bill. Be sure to consult with a tax professional on potential implications. 

Reason #2 To Use a Home Equity Credit Line in Retirement: Guarding your portfolio in a bear market

Martinez points out that managing money for retirement is quite different from managing money while you are in the accumulation years. In a down market, taking regular withdrawals on your investment portfolio can have a more severe impact on your nest egg.

“If you can either avoid or lower withdrawals in down years, you can increase the expected life of your portfolio and your potential lifetime income stream,” she says. A home equity credit line can serve as an alternative source of cash in a period of falling stock prices, allowing you to gradually repay the loan your portfolio recovers.

Reason #3 To Use a Home Equity Credit Line in Retirement: Making home improvements

Home repairs may be inevitable, but they can be a retirement budget buster.

“If you spend 20 to 30 years in retirement, of course, your home will need work,” Martinez says.  “A home equity line of credit can be beneficial for this expense rather than disrupting your investment portfolio.”

An added benefit of using a home equity credit line for home improvements and repairs is that the money goes back into your home and the interest may be tax deductible when used for capital improvements. Check with a tax professional to learn more.

Reason #4 To Use a Home Equity Credit Line in Retirement: Funding the down payment on a new home

Retirement is a time of transition, and with the lifestyle changes often come an eventual move.

“By borrowing against your home equity, you may be able to fund the down payment on the new home,” Martinez says, noting that this may be a better approach than liquidating investments, which could entail trading costs and tax consequences. However, she warns that tapping all your home equity could be particularly detrimental in a down market, further reducing your equity.

Home equity credit lines come with a major caveat. Because these loans use your house as collateral, defaulting on your payments could result in foreclosure. Additionally, if your home values decrease, you could end up owing more than your home is worth.

“Interest rates are variable and can increase, so there is some caution to be considered with the variable rate structure,” Martinez explains.

Following are some situations where you should avoid using a home equity line of credit:

Bankrolling everyday expenses. It may be tempting to treat a home equity credit line like a personal piggy bank, but Martinez says it’s not a good idea to use it to fund a shortage of cash flow in your budget or a dream vacation.

“You may be tempted to not pay this off immediately, and have this debt for five, 10 or 15 years,” she says.

Shifting debt. While using a home equity credit line for a big purchase like a car could have a positive financial impact, it could simply mean you’re shifting debt from one credit facility to another.

“You’ll want to make sure that the rate and monthly payment has a positive impact and consider that this is increasing the debt on your home,” Martinez explains.

A Zions Bank Home Equity Line of Credit* can work to your advantage in retirement, but it’s wise to speak with a banker first about your personal financial situation. Zions Bank also offers home refinance loans and home equity loans and local decision making so you can enjoy a faster turn-around time on loan applications.

Kallee Feuz is a public relations officer for Zions Bank.

*Loans subject to credit approval. Terms and conditions apply. See banker for details.

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