Turn Home Equity Into Income in Retirement

A reverse mortgage allows you to tap the increase in your home's value without selling. 

- SANDRA BLOCK

In the second quarter of 2022, homeowners age 62 and older possessed a record $11.2 trillion in home equity, according to the National Reverse Mortgage Lenders Association. In some high-cost parts of the U.S., the homes seniors bought years ago for a modest amount are now worth $1 million or more.

But owning a home worth $1 million isn't the same as having an equivalent amount of money in the bank. To cash in on the rise in your home's value, you usually need to sell-something many retirees are reluctant to do. And while looking up your address on Zillow may make you feel rich, an increase in your home's value typically means higher property taxes and potentially higher homeowners insurance premiums, too. Modifications to make your home more senior-friendly could put additional pressure on your finances.

A reverse mortgage is one way to solve this problem. With a reverse mortgage, you can convert your home equity into a lump sum, monthly payments or a line of credit. But unlike a traditional mortgage or home equity line of credit, you don't have to make principal or interest payments on the loan for as long as you remain in the home.

If you're retired and making withdrawals from your nest egg, taking out a reverse mortgage line of credit as early as age 62 could protect your investment portfolio against what's known as sequence-of-return risk: If you take withdrawals from a portfolio that has been diminished by a bear market during the early years of retirement, you have fewer assets to generate returns when the market recovers. That will increase the risk that you'll run out of money in your later years. But with a reverse mortgage line of credit, you can withdraw funds to pay expenses until the market rebounds and your portfolio recovers.