Retirees are increasingly exploring home equity as a tool to manage their rising costs. While inflation affects all of us, retirees are particularly vulnerable to its effects because of their fixed incomes. However, because many seniors are homeowners, using home equity products could help them tap into their biggest asset.

"Many retirees purchased their homes for significantly less than the current value and can enjoy the fruits of this value appreciation to be more comfortable in their later years," says Sarah DeFlorio, Vice President of Mortgage Banking at William Raveis Mortgage.

Home equity lines of credit (HELOCs) and reverse mortgages are two popular home equity products, but they work very differently and are properly suited to different situations. If you're a current retiree or plan to retire soon and you own your own home, the below guide could help you choose the best lending tool for you.

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When should retirees choose a HELOC over a reverse mortgage?

While every retiree has different financial circumstances, there are some broad guidelines for when each of these products may be more advantageous. Here's what to consider:

When to consider a HELOC

A HELOC functions as a revolving line of credit taken from your home equity. Similar to a credit card, you can use your HELOC as often and as many times as you want, as long as you're within your credit limit.

The easy access to cash and the ability to draw again and again makes a HELOC a good option for both one-time and ongoing expenses, as long as you're able to repay the balance. And because you'll have to repay the HELOC by the end of the repayment period (often a 10- to 20-year period that follows a 10-year draw period), it's a good option for retirees who are only looking for a temporary cash solution.

"It's ideal if you need to fund a one-time project like a home upgrade, want to consolidate high-interest debt and pay it off on a timeline, plan to sell or downsize in the next few years, or want to preserve home value for heirs," says Michael Brennan, President at Nationwide Mortgage Bankers. "It also works well when you have other assets and just need a liquidity bridge."

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When to consider a reverse mortgage

Unlike a HELOC, a reverse mortgage serves as a longer-term solution. You can pull money from your home, often in a single lump sum or a series of payments. Then, you won't have to repay the loan until the primary borrower either dies or sells the home.

The nature of reverse mortgages makes them an option for retirees who need to borrow money they won't have to repay, at least not while they're still in the home. For example, if a retiree doesn't have sufficient savings and needs an influx of cash each month to help cover their bills, a reverse mortgage could be the answer.

For example, let's say you've retired with less money than you hoped and don't have the option of bringing in additional income. You could get monthly payments from your reverse mortgage to help cover your budget shortfall. As you receive payments, your loan balance rises — it's the exact opposite of a traditional mortgage. And in most cases, you (or your heirs, after your death) would use the proceeds of your home sale to repay the loan.

"It can offer predictable monthly payments or lump-sum cash to handle those rising costs without draining your 401(k) or IRA," says Brennan.

It's worth noting, however, that reverse mortgages are are limited to homeowners 62 years or older. If you're a younger retiree and need to tap into your home equity, you'll have to explore other alternatives.

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HELOC vs. reverse mortgage: Which is right for you?

When choosing between a HELOC and a reverse mortgage, it's important to consider what you need the money for and how long you need it. If you need the money for a one-off expense, a HELOC is often a good option. But if you're looking for an option to help cover your monthly expenses, a reverse mortgage may be a better fit.

Similarly, the timeline is key. You'll have to pay back a HELOC by the end of the repayment period, which could be between 20 and 30 years after you open it. Meanwhile, you won't have to repay a reverse mortgage until you leave the home (or your heirs repay it on your behalf after you die). Therefore, if you can't swing the monthly payments on a HELOC, a reverse mortgage may be your only option.

It's important to consider whether you hope to leave your home to your loved ones. When you borrow from a HELOC, you'll eventually repay the balance, meaning you'll restore your equity in the home. But with a reverse mortgage, you typically don't pay it back while you're living in the home. Therefore, in the event of your death, your heirs may be forced to sell your home to repay the balance. And because the loan accrues interest the entire time, the balance continuously rises. By the time the house is sold, there may not be any money left for your loved ones to inherit after the loan has been repaid.

Finally, as with any other lending product, make sure you understand the cost and terms. Both HELOCs and reverse mortgages are a bit more complex than your standard installment loan, and both will have applicable fees and interest. 

"While reverse mortgages can provide needed cash flow for some retirees, particularly those on a fixed income, they've also developed a reputation for high fees, complex terms, and aggressive marketing, raising concerns about whether borrowers fully understand what they're signing up for," says Sean Briscoe, the Director of Products and Payments at Alliant Credit Union. "In contrast, HELOCs are more transparent, with straightforward repayment terms and fewer surprises."

In either case, don't commit until you have a clear understanding of what you're borrowing and why, as well as your responsibilities as the borrower.

The bottom line

Tapping into your home equity can be a great way to get an influx of cash as a retiree, and HELOCs and reverse mortgages are two solutions to help you do that. However, neither of these solutions is right for every retiree, and it's important to analyze your unique situation to determine the optimal fit. If you aren't sure which direction to go, a financial planner or another knowledgeable professional can take a holistic look at your personal finances to advise you on the best option.