How to Use a HELOC Strategically in Retirement

A HELOC can be a useful tool to manage cash and ride out bumpy investment markets in retirement.

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If you've worked hard to pay off your house, taking on mortgage debt in retirement may sound as appealing as getting chained to a 9-to-5 desk job.

But used wisely, a home equity line of credit, which lets you borrow money against your home, can be a powerful tool to preserve the longevity of your financial portfolio.

Here's what you need to know.

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How to use a HELOC in retirement

With a home equity line of credit, or HELOC, you can draw the amount of money you need, up to the credit limit, when you need it. Typically, you have 10 years to draw money and pay interest only on the amount you draw. Then you have another 20 years to pay back the balance, plus interest.

A HELOC is not a way to support an otherwise unaffordable lifestyle. Instead, it's an alternative to manage your cash. Here are a couple of smart uses.

Fund big purchases or projects

Using a HELOC lets you spread the cost over several years, so you don't have to withdraw a huge sum all at once from an investment portfolio, says Anthony Watson, a certified financial planner and founder of Thrive Retirement Specialists in Dearborn, Michigan. Taking a big chunk from retirement accounts can have tax implications — it could even bump you into another tax bracket — and you lose potential investment gains on the money you draw.

HELOCs usually have lower interest rates than personal loans and credit cards. In addition, the interest may be tax-deductible when used for home improvements, said Jon Giles, head of consumer direct lending at TD Bank, by email.

Before drawing from a HELOC, set a time frame for repayment that meets your goals, not just the lender's requirements.

Ride out a bumpy investment market

Financial planners generally advise keeping at least one to three years of living expenses in liquid assets — such as savings, checking or money market accounts — when you're retired. That way, you can rely on cash reserves when the market is down and avoid selling investments.

The drawback is what financial planners call "cash drag, the return essentially that you don't get from investing the cash," Watson says.

A HELOC can let you invest some of that cash while preserving your cover during a down market. Here's how it works: You'd draw from cash savings first for living expenses, and then, if needed, you could draw from the home equity line of credit while investment markets recover. Then, once it's a better time to sell investments, you'd pay down the HELOC, replenish savings and continue drawing from your investment portfolio, Watson says.

"Having a home equity line of credit in place for a market downturn, so you don't have to sell assets at an inopportune time, can be very strategic," says Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

"If you're going to do this, make sure that you do so as part of a coordinated financial plan," Cheng says.

A financial planner can help you get the details right.

Qualifying for a HELOC in retirement

The average time from application to final approval for a HELOC is about 50 days and varies depending on the complexity of the application, Giles said.

To decide whether you qualify for a HELOC, lenders consider:

When someone is still working, the lender will verify income through pay stubs, W-2 statements or tax returns.

"For a retiree, income will still need to be verified and may include pension income, Social Security and/or income from retirement accounts," Giles said.

HELOC & Home Equity Loans from our partners

Spring EQ - HOME_EQUITY logo
Check Rate

on Spring EQ

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4.5

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Spring EQ - HOME_EQUITY logo

4.5

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Min. credit score 

640

Max loan amount 

$500,000

Check Rate

on Spring EQ

Figure - HOME_EQUITY logo
Check Rate

on Figure

Figure

4.5

NerdWallet rating 
Figure - HOME_EQUITY logo

4.5

NerdWallet rating 
Min. credit score 

640

Max loan amount 

$400,000

Check Rate

on Figure

Rocket Mortgage - HOME_EQUITY logo
Check Rate

on Rocket Mortgage

Rocket Mortgage

4.0

NerdWallet rating 
Rocket Mortgage - HOME_EQUITY logo

4.0

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Min. credit score 

680

Max loan amount 

$350,000

Check Rate

on Rocket Mortgage