3 home equity options seniors should know

As we age, our financial needs change, and so do our options for accessing potential sources of income. Many seniors find themselves in need of additional funds to cover the rising costs of health care and other expenses. One financial option for older homeowners is to tap into their home equity.

Home equity refers to the portion of your home's value that you own outright — in other words, your mortgage balance minus any payments you've made to date. The more equity you have, the more you can borrow, often at rates considerably lower than you'll get with financing options like credit cards and personal loans.

There are several ways seniors can access their home equity, including one not available to younger homeowners. To find the best option for you, it's important to understand how each works and the benefits and risks that come with them.

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3 home equity options for seniors

All of the options below can be used for any purpose you like, including paying for medical expenses, home improvements or providing an additional source of retirement income.

Home equity loan

A home equity loan gives you a lump sum of cash, which you pay back with interest. These loans typically have fixed interest rates and monthly payments. They can be useful if you need a significant amount of money all at once, such as to pay a large medical bill or for major home repairs.

Home equity loans come with closing costs, which should be taken into account when deciding how much to borrow. And most importantly, these loans are secured by your property, which means if you're unable to keep up with payments, you could lose your home. So be sure you can comfortably afford payments for years to come before taking out a home equity loan.

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Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a revolving line of credit that works like a credit card. You can borrow from this line as needed and will only pay back the amount you borrow. Interest rates on HELOC are variable and can change over time, which makes payments less predictable than with a home equity loan.

That said, because you only borrow what you need as you need it, you could pay considerably less than you would on the lump sum a home equity loan provides. The borrowing flexibility HELOCs offer makes them ideal for ongoing expenses like covering gaps in your budget as they arise.

As with home equity loans, HELOCs are secured by your home, so never borrow more than you know you can repay. You'll also need to pay for closing costs, either out of pocket or by rolling them into your total loan repayment costs.

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Reverse mortgage

One of the most popular ways for seniors to tap into their home equity is with a reverse mortgage. Reverse mortgages are only available to homeowners age 62 and older. Unlike other home equity options, reverse mortgages essentially "pay" you instead of the other way around. 

You can receive the proceeds from a reverse mortgage as a lump sum, line of credit or monthly payments, and as long as you're living in the home, you don't need to pay the lender back. This can help provide some much-needed breathing room in your budget at a time when your income may be more limited than in the past. However, if you still owe money on your original mortgage when you take out a reverse mortgage, you'll need to use some of the proceeds to pay off your remaining balance.

Bear in mind that, as with the other options above, your home serves as collateral for a reverse mortgage. While you won't have any monthly payments, you will need to stay current on your property taxes and home insurance or you risk foreclosure.

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The bottom line

Ideally, you'll have enough money in retirement to cover expenses that arise. But it's not always possible to save as much as you'd like, and sometimes, unexpected costs come up that can throw off even the best-laid plans. In these cases, borrowing from the equity you've built in your home over the years can be a cost-effective source of funds so you can better enjoy your retirement years.