Wealth Wise is Kiplinger's advice column on navigating retirement-related dilemmas. Questions from real people, for real people. Got a question? See below for how to send it to us.

DEAR WEALTH WISE: We are both 61, still working, and earn $400k a year. We've accumulated substantial unsecured debt and want to pay it off using an equity loan from our primary home. However, because of our debt-to-income ratio, we can't get approved for an equity loan from our credit union. We have a second home (the reason for our high debt ratio), which we bought with our single daughter and that serves as her primary home. My husband holds the power of attorney and manages his 90-year-old father’s finances and assisted living expenses.

Should we use money from his father’s account to pay the unsecured loans — improve our DTI — and then get an equity loan to pay back what we took from his father’s account? — Up to Our Ears

Dear "Up to Our Ears": It's not a given that earning a high salary makes debt easy to manage. Even with a generous income, you may find yourself overwhelmed with monthly debt payments.

Here, we have a 61-year-old couple earning $400,000 who needs help managing their debt. A home equity loan is commonly a great consolidation tool for unsecured debts because it can offer a considerably lower interest rate.

But this couple has a high debt-to-income ratio (DTI). That means they may struggle to get approved for a home equity loan. And even if they do get approved, they may face a less favorable interest rate due to their borrower profile.

The couple wants to know if borrowing the money from the husband's father's account is a smart course of action. The husband has power of attorney and can easily access that money. But while theft is clearly the last thing on this couple's mind, as they've expressly stated their intent would be to repay every dollar, this approach raises a few red flags.

It's a very slippery slope

When a person gets power of attorney over another person's finances, it's often because they've become incapacitated due to illness, injury, or dementia. As such, they're not in a place to make clear-headed, informed financial decisions.

The person holding power of attorney is often a relative and a trusted person by nature. But here, borrowing a lump sum of money may breach that trust.

"The power of attorney from an elderly father to his son only allows the son to act for his father’s benefit, and it also includes a fiduciary duty that the agent, the son, owes to his father," explains Asher Rubinstein, estate planning attorney and partner at Gallet Dreyer & Berkey.

"Using the elderly father’s money to pay off the son’s loans is a definite breach of the fiduciary duty, as it only benefits the son and depletes the father’s assets. It may also cross the line of criminality."

Kerri Koen, estate planning attorney at Modern Legacy Law Group, agrees.

"Whenever your strategy depends on 'we’ll pay it back later,' you can be sure there are legal and ethical red flags," she says. "Using an elderly parent’s funds under a power of attorney to solve your own debt problem, even temporarily, is almost always a breach of fiduciary duty that will create legal exposure for you and risk to your parent’s care, not to mention the possibility of significant family conflict."

Jonathan Codispoti, Founder at Legacy Wealth Strategies, says the repercussions of taking an unauthorized loan could be significant.

"I understand the logic," he says. "You see a pool of money, you have every intention of paying it back, and nobody technically gets hurt. But the law, the ethics, and the practical risks all point in the same direction."

Codispoti also says that in this situation, the collateral damage could be enormous.

"Your husband could face criminal charges, civil suits from other heirs, and an Adult Protective Services investigation triggered by his father's assisted living facility, which is a mandated reporter," he explains. "If his father is on Medicaid or might apply within five years, the transfer creates a 'look-back' problem that can disqualify him from benefits and leave your family personally responsible for care that easily runs $8,000 to $12,000 a month."

Additionally, Codispoti points out that if you were to move forward with your plan and apply for a home equity loan, you may be asked to document the source of the funds used to pay off your debts.

"Misrepresenting that on a loan application is itself fraud," he says.

An authorized loan may be a different story

It's clearly illegal to borrow from a parent's funds without their consent. But an authorized loan may be acceptable, provided the father is capable of making that determination.

"If they are borrowing from the father and he has the capacity to agree to this, then that would be a better approach," says Koen.

Rubinstein agrees, but with a strong caveat.

"Is the 90-year-old father capable of gifting to his debtor son himself, or giving the son written, notarized permission to use the power as anticipated? If not, then it would be over-reaching for the son to use the power in the way he is considering," he insists.

However, Rubinstein cautions, "Even if the father makes a gift to the son, if the father is frail, someone — another potential beneficiary — could try to argue that the son over-reached and unduly influenced the father to make the gift."

You have other options for addressing your debt problem

Since using the father's funds in any capacity is potentially problematic, a safer move may be to address your debt on your own. The good news, says Codispoti, is that you may have more options than you think.

"Shop the loan," he says. "Credit unions are often conservative on DTI. A mortgage broker can place you with banks or non-bank lenders that underwrite high-income borrowers with elevated DTI from a second property more flexibly. Cash-out refinances and non-QM HELOCs are worth asking about."

Codispoti also suggests addressing the root cause of your issue.

"The second home is driving your DTI," he says. "Hard as the conversation may be, explore whether your daughter can refinance it into her own name, whether you can restructure ownership, or whether selling is the right call."

Take the ethical route

You may technically be able to get a loan from your husband's father without crossing a legal line. Whether that's the right thing to do is very questionable.

"Your father-in-law is 90," Codispoti says. "The money in his account exists to ensure his dignity, comfort, and safety in the final chapter of his life.... Diverting it, even briefly, puts his welfare at risk to solve a problem he didn't create."

A word from Wealth Wise

We know that many Gen X readers, like this couple, struggle to provide support to their adult children and aging parents, all while planning their own retirement. In many cases, something's got to give. As our article explains, selling the second home that the daughter lives in might just be the best long-term option.

Moreover, an unspoken (or perhaps unconscious) implication of the reader's question is that the father, at 90, won't be around much longer. That would free up his assets and make paying back the loan moot. That's a dangerous assumption, given that the Social Security Administration's Life Expectancy Calculator estimates that someone born in 1936 will likely live another four years and that more Americans are living to 100.

So, play it safe: Live with the resources you have now and know that your inheritance will be a welcome windfall someday.

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our writers and experts, in this advice column, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial adviser regarding any questions you may have in relation to the matters discussed in this article.

Read More

• How an Elder Law Attorney Can Help Protect Your Aging Parents From Financial Mistakes
• We're 60 with $550K saved and will inherit $3 million. Can we retire now, even if we can't afford it?
• What you Learn Becoming Your Mother's Financial Caregiver
• I Am 55 With a $1.5 Million 401(k). Should I Take a 401(k) Loan to Pay for a Home Improvement Project?

If you need cash for a major expense, you might be considering tapping your home equity. With a home equity line of credit (HELOC), a home equity loan or a cash-out refinance, you can access the equity in your home and use that money for renovations and other expenses.

But it’s more important than ever to understand the potential risks that come with tapping your home equity. According to the Intercontinental Exchange Mortgage Monitor report, Americans hold approximately $17 trillion in total equity, with about $11 trillion tappable.

High home values and limited inventory have resulted in equity-rich but cash-constrained households. Using your home’s equity can be a risky move, so be sure you understand all of the factors involved before deciding if this is the right decision for you.

Borrowing costs remain elevated, with new pressures in 2026

Home equity borrowing is still relatively expensive, and recent economic conditions are adding more uncertainty to where rates go next.

As of April 2026, average home equity loan rates are hovering around the 8% range, according to Bankrate:

• 5-year home equity loan: 7.89%
• 10-year home equity loan: 8.02%
• 15-year home equity loan: 8.00%

Rates vary based on credit score, loan-to-value ratio and lender.

These rates are noticeably higher than what many homeowners are used to, especially those who locked in mortgage rates below 4% in recent years.

At the same time, the Federal Reserve has held rates steady through its January and March meetings, signaling a more cautious approach to rate cuts. That means borrowing costs tied to the prime rate, including HELOCs, have remained relatively high so far this year.

Geopolitical tensions, including the ongoing war in Iran, are also contributing to inflation pressure, particularly through energy prices. That added uncertainty can make it harder for rates to move lower in the near term.

In this environment, the type of loan you choose matters more. Home equity loans offer fixed rates, which can provide predictable payments. HELOCs typically come with variable rates, meaning your costs could change over time. Meanwhile, mortgage rates, which affect cash-out refinancing, tend to follow the 10-year Treasury yield and remain sensitive to inflation and broader market conditions.

When tapping your home equity can make sense

Tapping your home equity may make sense when you’re using the funds for a clear, high-value purpose. For example, you might finance home improvements that increase your property’s value, helping offset the cost of borrowing over time.

Some homeowners also use home equity to consolidate high-interest debt. Replacing a credit card balance with a rate around 20% with a lower-rate home equity loan or HELOC can reduce interest costs and simplify payments.

Home equity can also help cover large, planned expenses, such as education costs or major medical bills. In these cases, the value of the expense may justify the interest you’ll pay. Used intentionally, home equity can be a strategic financial tool — not just a way to cover everyday spending.

Use the tool below, powered by Bankrate, to explore and compare today's home equity loan and HELOC options from multiple lenders:

When tapping your home equity could be a risky move

Tapping your home equity can be risky. When you use your equity, your home is collateral. If you default on your loan, you could face foreclosure.

HELOCs have variable interest rates. While your interest rate could drop, it could also rise, meaning your payments could be larger than you anticipated, and you might ultimately pay much more in interest than you’d planned.

It’s also possible to overborrow home equity. When paired with market uncertainty resulting in fluctuating interest rates and home values, overborrowing could increase your chance of defaulting on your loan and facing foreclosure. It's always best to borrow no more money than you absolutely need, which will also help minimize what you pay in interest.

Home equity loan vs. HELOC vs. cash-out refinance

Let’s take a look at how three methods of accessing home equity compare:

• Home equity loans are fixed-rate loans, so you’ll have predictable, set payments throughout the loan’s term.
• HELOCs are revolving credit lines that you can draw from, repay and reuse. They offer flexibility, but variable rates mean your payments can change over time.
• A cash-out refinance replaces your existing mortgage with a new, larger loan, resetting your interest rate and loan terms.

Since many homeowners are locked into ultra-low mortgage rates, refinancing tends to be a less attractive option right now.

Timing matters more than most borrowers realize

Timing matters when tapping your home equity. Rates could fall later in 2026, but that’s far from certain. Waiting might help you secure a lower rate, but it could also work against you if home values decline or lending standards tighten.

The key is balancing timing with necessity. If you’re facing a time-sensitive expense, such as an urgent home repair or education costs, waiting for a better rate may not be practical.

How to decide if borrowing is right for you

This simple checklist can help you decide if borrowing against your home equity is right for you:

• Do you have a clear purpose? Tapping home equity is risky, so make sure that your purpose justifies that risk.
• Can you comfortably afford payments? With your home as collateral, you risk foreclosure if you can’t make the payments.
• Are you choosing the right product? Be sure you understand the pros and cons of each home equity product to choose the one that’s best for your situation.
• Have you compared lenders? Rates, terms and loan costs can vary from lender to lender. Compare quotes from multiple mortgage lenders to find the best option.

Think beyond access to equity

Home equity can be a powerful financial tool, but it comes with real risk. Because your home is on the line, it’s important to borrow with a clear purpose and a plan to manage the payments.

The decision isn’t just about whether you can access the funds. It’s about whether using your equity supports your broader financial goals and makes sense given today’s rates and market conditions.

Related Content

• HELOC Rules Are Changing in 2026
• 4 Ways To Use Your Home Equity To Boost Your Retirement
• What Home Equity Is and Why It's a Valuable Long-Term Investment
• How a Home Equity Line of Credit (HELOC) Works

With a home equity line of credit, or HELOC, you can use your home’s equity to cover costs like renovations, education or emergency expenses. With Americans collectively holding about $17.3 trillion in home equity, a level not seen in decades, many homeowners now have more borrowing power than they realize.

A HELOC’s flexibility is appealing, but your monthly payment can shift based on your credit, loan terms and interest rate. Understanding how those factors work is key before tapping your equity.

Here’s what a $50,000 HELOC may cost each month and how to decide if this type of financing fits your needs.

What affects your HELOC payment?

Many factors affect your HELOC payment, so it’s important to consider your specific situation and how these factors will impact your rates:

• Credit score: If you have a high credit score, you’re more likely to qualify for a lower HELOC interest rate. If your credit score is lower, though, you’ll probably have a higher interest rate. Keep in mind that even if you have a HELOC already, if your credit score drops during the loan term, your lender might increase your interest rate because they consider you a higher-risk borrower.
• HELOC term: Your HELOC term will affect your rates, too. Shorter terms usually carry lower interest rates, and longer terms will typically have higher interest rates. Most HELOCs consist of a draw period ranging from five to 10 years, during which you make interest-only payments. The repayment period can last 10 to 20 years, and during that period, you’ll be repaying the principal and interest, meaning your payments will increase.
• Loan-to-value ratio: Your loan-to-value ratio compares the amount of your loan to your home’s appraised value. The lower this ratio is, the less risky lenders consider you to be, meaning you’re likely to get a lower interest rate. According to First Merchants Bank, you’ll need a loan-to-value ratio of 90% or lower to qualify for a HELOC. For the best interest rates, your loan-to-value ratio should be 80% or less.
• Prime interest rate: Your HELOC interest rates are based on the prime rate, which is affected by the Federal Reserve’s actions. According to the Wall Street Journal, the average HELOC interest rate as of November 11 is 7.82%.
• Lender margins: In addition to the prime rate, each lender can add their own margins to determine your final interest rate. Lender margins can be negative or positive, and they vary from lender to lender. As a result, it’s best to shop around and compare quotes from multiple lenders before taking out a HELOC.
• Variable rate adjustments: Most HELOCs have a variable interest rate, so your interest rate can change throughout the term of your loan. As the prime rate fluctuates, your interest rate could increase or decrease, too.
• Rate cap: Many lenders implement an interest rate cap to protect you if interest rates decrease dramatically. Often, that cap is around 18%, but that can vary depending on your lender.

How much a $50,000 HELOC costs per month

Here’s an example of what a $50,000 HELOC could cost based on current rates and typical loan terms. The United Nations Federal Credit Union HELOC payment calculator makes this easy.

If you have excellent credit and a low loan-to-value ratio, you might qualify for an interest rate around 7.82%. With a 10-year draw period followed by a 20-year repayment period, your payments would begin as interest-only and later shift to principal and interest.

The table below outlines how those payments break down:

Note: These payments don’t account for potential changes from a variable interest rate. Your actual monthly cost may increase or decrease over time.

HELOC vs. home equity loan: What’s the difference in monthly cost?

Like a HELOC, a home equity loan lets you borrow against your home’s equity, but the structure is different. A HELOC gives you flexibility to borrow only what you need during the draw period, while a home equity loan provides a single lump sum upfront.

Home equity loans also come with fixed interest rates, which means your monthly payment stays the same throughout the life of the loan. That predictability creates a very different cost profile compared with a HELOC’s variable rate and interest-only draw period.

Because of those differences, your monthly cost on a home equity loan may be more stable, while a HELOC’s payment may rise or fall over time.

Use the tool below to explore some of today's top home equity offers, powered by Bankrate:

Pros and cons of borrowing $50,000 from your home equity

There are several pros and cons to taking out a $50,000 HELOC. Its biggest advantage is flexibility. During the draw period, you can borrow, repay and borrow again up to your credit limit. For example, if your limit is $50,000, you could borrow the full amount, repay $15,000 and then borrow that $15,000 again whenever you need it.

This revolving structure makes a HELOC useful when you’re unsure how much you’ll ultimately need, such as when funding education costs or paying for a home upgrade or renovation.

During the draw period, another advantage of a HELOC is that your required payment typically covers only the interest, not the principal. You can choose to pay down the principal during this time, but the option to make interest-only payments keeps your initial costs lower. That trade-off does mean your principal and interest payments will be higher once the repayment period begins.

There are downsides to consider, too. Most HELOCs have variable interest rates, which can rise or fall throughout the loan term. Because your rate isn’t fixed, your monthly payment can change, and you’ll need to be prepared for potential fluctuations as the prime rate moves.

A HELOC also uses your home as collateral. If you’re unable to make the required payments, you could put your home at risk. It’s important to weigh that possibility carefully and make sure you’re comfortable with the long-term commitment.

When a $50,000 HELOC makes sense

A $50,000 HELOC can make sense in several situations. It’s often used for home improvements, particularly if the renovation is likely to increase your property’s value. It can also provide quick access to funds for large or unexpected expenses, such as medical bills, education costs or business startup needs.

A HELOC may also work as a debt consolidation tool. If you’re carrying multiple high-interest debts and qualify for a lower HELOC rate, you could use the line to pay those balances off and replace them with a single monthly payment. Just be mindful that HELOCs have variable interest rates and longer repayment periods, which could result in higher overall costs if rates rise.

As with any borrowing decision, it’s important to consider how predictable your expenses are and whether the flexibility of a HELOC aligns with your financial situation.

Tips before applying for a HELOC

If you decide a HELOC is right for you, it’s important to carefully shop around. Interest rates and rate caps can vary from lender to lender, so get multiple offers and compare them. Make sure that you understand all of the terms of the loan, and if you’re not clear on something, ask for more information.

A HELOC may be helpful in certain situations, but it’s not the right choice for everyone or every scenario. Consider the long-term affordability of this type of loan and make sure that you’re comfortable with the risks before you take out a HELOC.

Related Content

• 5 Ways to Shop for a Low Mortgage Rate
• How Does the 10-Year Treasury Yield Affect Mortgage Rates?
• 13 Home Features That Add Value and Speed Up a Sale

Homeowners today are sitting on a historic amount of real estate wealth. Americans collectively hold about $17.3 trillion in home equity, a level not seen in decades.

At the same time, borrowing costs tied to that equity have begun to ease. Many home-equity loans, home-equity lines of credit (HELOCs) and cash-out refinances have recently dipped below 8%, after peaking much higher during the rate-hike cycle.

With 2026 approaching, a year that could bring both lower interest rates and tax-law changes, many homeowners are weighing their options. Should they tap their equity now, or wait in hopes of better savings later? Here is how to think about the trade-offs.

When borrowing now makes sense

Pulling equity out before the year ends can be a smart move in several scenarios, especially if you’re using funds strategically. Here are a few reasons when tapping your home’s equity might make sense.

You’re planning a renovation or essential home project.

If your roof, HVAC system or major appliances are nearing the end of their lifespans, tapping equity can be far more affordable than turning to high-interest credit cards or personal loans. Even slightly lower home-equity rates can translate into substantial long-term savings on large projects.

You’re consolidating high-interest debt.

Credit card APRs regularly sit above 20%, so even a home-equity loan in the 7% range can slash interest costs. For disciplined borrowers who won’t fall back into high-interest balances, tapping equity can serve as a true reset for their budget.

You want flexibility and expect rates to fall.

A variable-rate HELOC lets you borrow only what you need when you need it, and you’ll only pay interest on the amount drawn. If market rates continue to decline into the new year, your HELOC payments could adjust downward accordingly.

You’re confident in long-term home value and stable cash flow.

If your income is steady and your local housing market remains resilient, borrowing today might offer a healthy balance of affordability and liquidity without adding unnecessary financial strain.

Why waiting could be smarter and what’s at stake

Patience can pay off, especially if rate forecasts hold. Here are a few reasons you might want to wait before tapping your home’s equity.

Additional rate cuts might lower borrowing costs.

Some analysts expect the Fed to continue trimming rates into 2026. If that plays out, fixed-rate home-equity loans and even cash-out refinances could become cheaper next year. Shaving even half a percentage point off a large loan can save thousands over time.

Fixed-rate borrowers stand to gain the most by waiting.

Unlike HELOCs, which can adjust downward as rates fall, fixed-rate loans require you to lock in a rate at closing. If you’re planning a major home improvement project next year, delaying could give you more room to secure a better deal.

But waiting isn’t without risk, since your home’s value or local market conditions could shift. In some markets, tighter lending standards or shifts in demand could make equity borrowing more restrictive over time. Unexpected expenses can also come up. If a sudden repair or financial emergency hits, you might be forced to borrow during a less favorable window.

Waiting can save you money, but only if market conditions move in your favor and your financial needs stay predictable.

If you haven't taken out a home equity loan or HELOC yet, use our home equity tool below, powered by Bankrate, to compare rates you can get today:

Common mistakes homeowners make when tapping equity and how to avoid them

One of the biggest mistakes homeowners make when borrowing against their home is using the funds for non-essential or short-lived expenses such as vacations, gifts or lifestyle upgrades. While tempting in the moment, these uses don’t build long-term value and often leave borrowers with years of additional debt.

Another common misstep is assuming HELOC rates will continue to fall. Variable-rate credit lines can be helpful for flexibility, but they’re also unpredictable. If rates rise again, monthly payments can climb quickly.

Homeowners also frequently borrow more than they truly need, simply because lenders approve larger credit limits. Taking the maximum available amount can put unnecessary pressure on your budget and increase overall risk.

To avoid these pitfalls, focus equity borrowing on essential financial goals like necessary home improvements or consolidating high-interest debt, choose the loan structure that aligns with your risk tolerance, and borrow only what’s needed to meet your objective.

Practical advice for homeowners evaluating their options

If you’re weighing whether to pull equity now or wait until 2026, take these steps to make a sound decision:

1. Calculate your current equity (realistically)

Review your latest mortgage balance and compare it with recent comparable sales in your area. Don’t rely solely on automated valuation tools, since they can be overly optimistic.

2. Clarify your purpose

Equity borrowing makes the most sense when it strengthens your financial health: Increasing home value or lowering interest costs. If the purpose is discretionary, it’s better to pause.

3. Shop aggressively for a lender

Rates, closing costs and terms vary widely. Don’t automatically default to your current mortgage provider. A difference of even 0.25% can significantly affect long-term cost. It pays to shop around for a mortgage lender, since each lender might offer different rates, fee structures and support.

4. Choose the right loan structure for your personality and goals

A HELOC works well for gradual projects or flexible cash needs because you can draw funds as you go.
A home-equity loan suits borrowers who want predictable monthly payments and a fixed repayment timeline.

5. Run the numbers before committing

Estimate monthly payments, total interest costs and the potential tax benefits. Under current IRS rules, interest on home-equity debt is tax-deductible only when the funds are used for qualifying home improvements. That’s worth factoring into your calculations.

Tapping your home equity before 2026 can be a strategic way to unlock lower-cost financing, but only if the timing aligns with your broader financial goals. Borrowing now offers certainty and flexibility, especially for homeowners facing immediate needs or high-interest debt.

Waiting, meanwhile, might yield better rates, but also carries risks tied to home prices, market conditions and unforeseen expenses.

The right move depends on your financial stability, long-term plans and comfort with rate fluctuations. Approach the decision carefully, run the numbers, and choose the option that delivers the best balance of cost, stability and opportunity for your household.

Related Content:

• What Home Equity Is and Why It's a Valuable Long-Term Investment
• 4 Ways To Use Your Home Equity To Boost Your Retirement
• A New Kind of HELOC Lets Homeowners Fund Remodels on Their Terms

Question: I'm 61 with a $950,000 401(k) and need $50,000 for home repairs. Should I borrow given today's rates or take a 401(k) withdrawal?

Answer: The nice thing about owning a home is getting to build equity in a place that’s yours. Eventually, that could mean cashing in that equity to improve your financial life or simply enjoying the stability of staying put as long as you keep up with your mortgage payments and property taxes.

The downside of owning a home, though, is that expensive repairs can arise when you least expect them.

A home equity line of credit (HELOC) is a common source of funding that many homeowners rely on for large home repairs. However, the average U.S. HELOC interest rate remains high, at 7.82% as of November 5, according to Bankrate. A newer loan option is a home-equity-backed card, which might offer a slightly lower interest rate than a HELOC for borrowers with excellent credit, but still upwards of 6%.

If you’re 61 and need $50,000 to cover home repairs you can’t put off, you might be wondering if it pays to dip into your savings or borrow the money given today’s elevated interest rates. The answer might depend on how much savings you have.

With a $3 million nest egg, taking a $50,000 withdrawal might seem like a no-brainer. With a $950,000 balance in your 401(k), it becomes a much tougher question. It’s important to review your options carefully.

Use the tool below to explore some of today's top rates, powered by Bankrate:

It could be a good time to capitalize on 401(k) gains

Any funds you take out of your 401(k) is money that can no longer continue growing in a tax-advantaged fashion. When you have a pile of available money and borrowing rates are high, it could make more sense to tap your 401(k) rather than take on an expensive loan you might struggle to pay back.

Additionally, if your 401(k) balance is high, now might be an especially good time to take a withdrawal.

"The market’s near an all-time high," says Prudence Zhu, CPA, CFP, and Founder and CEO at Enso Financial. "With borrowing rates outside your 401(k) shooting up, grabbing a slice of those gains today means you can fix that leaky roof or creaky furnace without gambling on a market downturn."

That said, Zhu warns that if you have a traditional 401(k), as opposed to a Roth, your withdrawals aren't tax-free. Rather, they're taxed as ordinary income. If you're still working, says Zhu, the combination of your paycheck and a large 401(k) withdrawal could bump you into a higher tax bracket.

Zhu also points out that while you might not be covered by Medicare if you're only 61, you could have a spouse who's on Medicare, or who will be in a couple of years. If so, your higher income this year could impact their Medicare premium costs in two years and potentially subject them to IRMAAs.

A 401(k) loan could be a better option than a withdrawal

If you're still employed and plan to continue working, Zhu advises considering a 401(k) loan instead of a withdrawal. These loans allow you to pay yourself back with interest instead of an outside lender.

"That interest actually goes right back into your investments, so you’re essentially dollar-cost averaging your repayments," Zhu explains.

The danger of taking out a 401(k) loan is that if you switch jobs and can't repay it, the remaining balance is treated as a withdrawal. That could trigger a big tax bill.

But if taking a withdrawal in the first place is something you’re considering, a loan might be a fairly low-risk option if you’ve accepted the fact that you might be looking at a huge tax bill and are able to plan for it accordingly.

You’ll need to run the numbers carefully

Taking money out of a 401(k) at age 61 isn't necessarily a bad idea. Since you're beyond age 59½, you won't have to worry about facing an early withdrawal penalty on your money.

One thing to keep in mind is that the more money you withdraw from your 401(k) ahead of retirement, the less annual income your nest egg might provide you with. Additionally, as Joseph Patrick Roop, president at Belmont Capital Advisors, points out, depending on your tax bracket, if you need $50,000 to cover home repairs, you'll need to take a larger distribution.

"I will assume they are working and in the 22% federal and 5% state tax brackets," he says. In that case, "to take a distribution and net 50,000, you will need to take a total distribution of approximately $68,500."

Let’s say you don’t tap your 401(k) for home repair money and you retire with $950,000. Using the popular 4% rule, you'd garner an annual income of $38,000, not accounting for inflation-related adjustments.

If you whittle your nest egg down to $881,500, you’re looking at a baseline income of $35,260 instead. You’ll need to decide if you’re OK with that, based on your projected retirement income needs.

Do what’s best for your peace of mind

If you need money for a home repair, you'll either have to come to terms with taking it from your 401(k) or borrowing it and repaying the loan. For this reason, Zhu suggests you might want to choose whichever option sits best with you mentally.

“Given the hassle and uncertainty of job security plus the risks of loan repayment, sometimes the simplest fix is the best fix,” she says. “A direct withdrawal might just buy you the peace of mind you need, especially when it means a safer, happier home.”

Read More

• I'm 63 With an Aging House That Needs Repairs, but I Might Move to a Retirement Community In a Few Years. Is It Worth Making Those Fixes?
• You May Not Want to Downsize in Retirement: Here's Why
• Tax-Deductible Home Improvements in Retirement
• I Claimed Social Security Six Months Ago at 62, but My Checks Are Too Small. What Are my Options?

In my Kiplinger articles about how to build a better retirement plan, I often point out that homeowners who include home equity as an asset in their retirement plan can meet more of their retirement objectives.

The number of retirees who take advantage of a home equity conversion mortgage (HECM), however, has never equaled retirement experts' expectations.

It's not the design or pricing of the product, but rather, in my view, the limitations on how the performance of a HECM is presented and the challenges of integrating a HECM into a broader retirement plan.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

This article and the next discuss how we address these two issues. The answer is not radical — treat a HECM as an important asset class in an overall retirement solution while complying with applicable regulatory rules.

A HECM analysis is similar to that applied to other retirement assets

Here are the questions we have to answer for any asset, with additional questions when using a HECM:

• How does the value of the asset fluctuate with the market? For a HECM, how does the market price of your house increase or decrease?
• How does the asset deliver cash flow, and how is it taxed? For a HECM, what are the interest costs in borrowing that necessary cash flow, and how is that cash flow taxed?
• How do the liquid savings grow or fall to meet unplanned expenses? For a HECM, how does the available line of credit change over time?
• How much does the asset leave as a legacy in different market scenarios? For a HECM, what is the net equity in your house after paying off the mortgage at your passing?

The HECM analysis is similar to those for an investment asset class, with the key difference being that you're borrowing and incurring interest while still maintaining the asset, rather than withdrawing and giving up the potential returns on the investment.

The amount borrowed is not taxable, and interest paid is tax-deductible.

In addition, HECM interest rates are adjustable based on a formula unfamiliar to most homeowners. This is new territory for homeowners and, often, their advisers.

Consider housing price volatility while assessing this asset

To state the obvious, housing prices can vary from year to year, although over the past several generations they have trended up. There are also regional differences to take into consideration.

The region that includes Illinois, Indiana, Michigan, Ohio and Wisconsin, for instance, along with the region of Alabama, Mississippi, Kentucky and Tennessee, both experienced lower pricing growth than the rest of the country from 1995 to 2025.

The broad message for planning is not to try to predict the exact amount of savings or legacy for each homeowner, but to demonstrate the possible impact of the price ups-and-downs on your own plan.

At certain moments during retirement, the price of your house could affect how you use a HECM.

While most investors have a general sense of the volatility of returns of the stock market, they are less aware of changes in housing prices unless they're looking to sell their house.

In our retirement planning, we include the value of the house, particularly because of its impact on the legacy one will pass on.

Set out below is the historical performance of U.S. housing prices over the past 30 years. Included for comparison is the 4.0% return commonly used in HECM illustrations. Note that the compound rate of return that actually occurred over this period was 4.7%.

Even during the period surrounding the 2008 financial crisis indicated in this graph, a homeowner's line of credit grew rather than fell. That feature is enabled by HECM terms and the U.S. Department of Housing and Urban Development's insurance guarantee (more about this below).

The essential take-away is that you'll want to stress-test this asset just like you would your investment accounts.

The tests will show what happens when the housing market dips and how your finances might look over a longer period of time.

HUD insurance reduces market risk for beneficiary

HUD backs every HECM loan, insuring that the borrower's family will not owe money at the passing of the borrower's or eligible surviving spouse, even if the outstanding loan balance is more than the value of the house. HUD insurance covers any difference for the lender.

The family can either sell the home and repay the loan, keeping any excess equity, or pay off the lesser of the loan balance or 95% of the home's appraised value to keep the home.

The insurance also provides for borrowers to continue receiving scheduled loan advances or line-of-credit access even if the lender goes out of business.

This can be valuable protection in adverse housing markets.

Now consider HECM interest rates

HUD requires that lenders illustrate HECM mortgage interest rates assuming a constant interest rate based on conditions when the HECM is set up even though most HECM loans are adjustable, and interest rates change either annually or monthly.

A study we did determined the adjustable rate, with annual adjustments, for a HECM taken out at the start of a 30-year period in 1994:

Note that the adjustable rate for a HECM taken out 30 years ago has been generally lower than the fixed rate illustrated for that same mortgage. That has a couple of effects.

While a lower rate does produce a smaller loan balance, it also lowers the amount of the line of credit over time.

Most importantly, the adjustable rates are a better indicator of how your results will emerge, reflecting both fluctuating interest rates and the cap and floor in the HECM design.

The impact of historical rates on HECM results

With the above background on historical housing prices and adjustable rates, the next step is to measure the overall impact on HECM results.

While there are virtually unlimited patterns of loans, we took an example for a male 65 with a home worth $1 million and no mortgage.

His goals were to supplement income until age 85, create stable and growing liquid savings for long-term care and unplanned expenses and leave a substantial legacy.

As seen in the chart below, even in the 2008-2009 volatile period, our homeowner was able to meet his longer-term objectives for income, liquid savings and legacy.

While similar to the housing market generally, the plan reflects the decline in prices post-financial crisis while still delivering the homeowner with income and liquid savings to supplement his retirement plan and still preserve a substantial legacy.

Maybe most of all, even with volatile interest and housing prices, the homeowner was able to age in place.

Benefits of combining HECM with QLAC

In earlier articles, we've talked about combining a HECM with a QLAC. "QLAC" stands for qualified longevity annuity contract, which provides guaranteed lifetime income with flexibility to select the date annuity payments begin, along with tax savings associated with the ability to defer some required minimum distributions (RMDs).

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

This QLAC calculator can help you figure out how it might work for you.

Most of the analysis of the benefits of a QLAC on a HECM have been based on fixed property growth and fixed HECM interest rates. But as discussed above, historical rates show a different picture.

In our next article, we will show how the addition of a QLAC in prior periods would have not only addressed longevity risk, but also reduced risks from fluctuations in housing prices and HECM interest rates.

For your next step, request an illustration at Go2Income. You'll get a better understanding of how the value of your house might fit into a retirement plan that helps you and your family.

Related Content

• For a Richer Retirement, Follow These Five Golden Rules
• What the HECM? Combine It With a QLAC and See What Happens
• Transform Your Retirement Plan With This Powerful Combo
• How Combining Your Home Equity and IRA Can Supercharge Your Retirement
• How Your Home Can Fill Gaps in Your Retirement Plan

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For many homeowners, the family home represents far more than a place to live. It's often the single largest store of wealth on their balance sheets.

Yet, when it comes to planning for retirement, long-term care needs or estate strategies, home equity remains one of the most underutilized assets.

There are several strategies available to homeowners looking to convert their equity into income or financial leverage:

Home equity lines of credit (HELOCs). These revolving credit lines require repayment and are typically best for short-term or planned expenses. They require good credit and reliable income, but they add debt to the homeowner's balance sheet.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Reverse mortgages. This well-known option allows homeowners to stay in their homes while receiving income. The downside is that interest accrues over time, often significantly reducing the remaining home equity.

Reverse mortgages also include such costs as insurance premiums and origination fees.

Cash-out refinancing. Homeowners refinance their mortgages to take out a lump sum of cash. This strategy can be viable in low-rate environments, but in today's high-interest landscape, it can dramatically increase monthly payments.

Shared equity models. These newer solutions offer homeowners the ability to sell a minority share of their future home value in exchange for cash today.

Typically, this method doesn't involve monthly payments or interest. Like a reverse mortgage, they're nonrecourse, meaning there is no personal liability.

The shift: From debt to shared value

Unlike traditional financing options, shared equity solutions aren't loans and don't require servicing debt obligations.

They're designed to be a strategic enhancement to an adviser's toolkit, helping reposition home equity from a passive asset into an active part of a client's overall financial strategy.

Using shared equity solutions is similar to using cash on hand.

Why it matters now

There is an estimated $35 trillion in home equity in the United States, according to the Federal Reserve Bank of St. Louis, with 41% of homeowners carrying no mortgage debt.

Meanwhile, the cost of retirement continues to rise, longevity risk is real, and funding long-term care is an increasing concern.

At the same time, interest rates and market volatility have made it more difficult for advisers and consumers to rely solely on traditional investment strategies.

Liquidity needs often collide with the desire to preserve and grow assets, supported by the fact that in 2024, according to LIMRA, more than $400 billion of new life insurance, annuity and long-term care insurance premiums were primarily funded with cash or through investment portfolio sales.

That reduces liquidity, creating tax consequences and limiting future investment growth opportunities.

Weighing the tradeoffs and tailoring the strategy to you

Each option presents distinct advantages and tradeoffs.

• Borrowing strategies offer immediate access to cash, but the debt can add pressure in retirement.
• Reverse mortgages reduce financial stress in the short term but diminish estate value and can be complex to unwind.
• Shared equity solutions, such as CHEIFS (Cornerstone Home Equity Insurance/Investment Funding Solutions), where I am the co-founder and CEO, provide tax-free cash without adding monthly obligations, but the homeowner shares a portion of the future home value upon sale or refinance.

No one-size-fits-all solution exists.

The right path depends on your financial goals, income, health outlook and estate planning intentions.

• If your priority is maintaining full ownership, a HELOC or refinance might make sense.
• If your objective is to protect cash flow without monthly debt obligations, reverse mortgages or shared equity models could be a better fit.

The key is to align your solution with your broader financial strategy.

Applications for homeowners and advisers

The versatility of home equity optimization through shared home equity products spans a range of planning needs:

Long-term care (LTC) planning. Homeowners can use tax-free funds to purchase dedicated LTC policies or hybrid life/LTC products, ensuring protection against future health care costs.

Lifetime income. Funds can be used to purchase immediate or deferred-income annuities, helping bridge retirement income gaps without drawing down investment portfolios.

Legacy and estate planning. Liquidity from home equity can fund irrevocable life insurance trusts (ILITs), charitable-giving strategies or intergenerational wealth transfers.

In-home health care. Homeowners can secure funding to age in place, enhancing quality of life while retaining independence.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

In-force policy funding. Clients with valuable existing life, annuity and/or LTC policies can use shared equity solutions to maintain or enhance these assets without cashing out or surrendering valuable benefits.

Pros and cons of shared home equity to consider

Pros:

• No monthly payments or debt service, with no fixed repayment term
• No impact on credit scores or cash flow
• Retention of homeownership rights and lifestyle
• Tax-free liquidity
• Flexible use of funds across planning needs and lifestyle enhancements
• Adviser-driven distribution to align with holistic planning

Cons:

• Future appreciation (and depreciation) of the home is shared with the company you're sharing equity with
• It's not a suitable solution for homeowners planning to sell or relocate in the short term. As the home is partially owned by an investor, it might be more challenging for homeowners to leave their homes as a legacy for their heirs without proper planning

Looking ahead

Optimizing home equity is no longer just about borrowing or downsizing. It's about managing wealth more intelligently to support strategic, tax-efficient financial plans.

Shared equity solutions are modern financing innovations that offer pragmatic alternatives that empower both homeowners and financial advisers to achieve their goals while maintaining control, flexibility and long-term value.

Related Content

• Reverse Mortgages: 10 Things You Must Know
• What Home Equity Is and Why It's a Valuable Long-Term Investment
• How a Home Equity Line of Credit (HELOC) Works
• Refinancing Your Home

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you want to retire with minimum money worries, you have a few options: Marry really well, pick the Powerball along with the other winning lottery numbers or consider a personalized retirement plan that produces high levels of income while maintaining and growing liquid savings late into retirement.

Most retirees need to solve for a couple of problems. They want lifetime income to cover their budget, including the occasional splurge, and a way to pay for the real likelihood of long-term care, which 70% of us will face. We’ll cover that in more detail below.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

A plan that addresses both income and savings

I wrote about how that personalized IRA4Income plan I mentioned above works, in my article What If You Could Increase Your Retirement Income by 50% to 75%?, and here’s a quick description:

IRA4Income is a multi-asset class retirement plan that addresses both income and savings. It will smooth out the effects of market gyrations and unplanned expenses, but for this article, let’s focus on long-term care expense.

Using our Go2Income planning technology, we’ve put the following assets together into IRA4Income:

• An IRA account invested 50/50 in fixed income and stock investments
• Lifetime income annuities with income starting immediately or in the future
• A home equity conversion mortgage (HECM) that generates income and liquidity

This will become important when we need to cover LTC expenses.

How big of an issue is long-term care?

More than two-thirds of retirees will incur an event requiring some form of long-term care.

Here are the median annual costs in 2025, depending on the type of care, according to CareScout and Genworth:

• Home health aide (44 hours a week): $80,000
• Assisted living facility: $73,000
• Semiprivate nursing home: $115,000
• Private room in a nursing home: $132,000

These costs will vary considerably by region. Here’s a projection of average costs considering the duration of a stay for a man, a woman and a couple.

For the purposes of the analysis below, we’ll assume $100,000 per year for five years, for a total of $500,000.

How does a retiree address this challenge?

Long-term care insurance is one solution. However, many don’t qualify or balk at the annual cost, which averages $2,000 to $4,500 per person and usually increases every year.

There often are sizable deductibles, and premium rates are not guaranteed.

Despite these issues, it is worth considering, particularly if you can cover a large portion of the event (deductibles) with your liquid savings.

Another possible solution is to use your liquid retirement savings exclusively, provided it doesn’t have an adverse impact on your retirement income. That’s where IRA4Income comes in.

For a sample male retiree, age 65, with $1 million in IRA savings and $1 million in the value of his house, here are the income and liquid savings with no adjustment for LTC costs.

Looks pretty good. However, that $500,000 event could come at any time.

How to build a self-insured plan

We’ll assume in this example that our retiree doesn’t have LTC insurance. (According to KFF, only 14% of people who are 65 and older do.) So, let’s build a self-insured plan around IRA4Income as follows.

• Set aside a portion of higher income from IRA4Income each year into a new investment account with low income taxes. In our retiree’s case, he’ll take $5,000 per year out of his $75,000 (and growing) income each year.
• When LTC costs appear, withdraw funds from the IRA account first. Since the bulk of the LTC expenses are tax-deductible in his situation, he’s not incurring a large tax bite on these withdrawals.
• Take a portion of the costs out of the new investment account and avoid drawing down on the HECM net line of credit, therefore preserving the highest value of his house to pass to his kids.

Now compare this to building a plan with only an IRA account, allocated solely to investments. Here’s what the savings under these two strategies look like.

In this scenario, the savings run out under the IRA-only strategy, and our retiree will have to sell his house or spend down the assets to qualify for Medicaid to pay for his long-term care.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

How to get started

Here’s a list:

• Check out LTC insurance. The earlier you buy it, the lower the premiums, although the insurance companies are allowed to increase premiums every year. An IRA4Income plan, with its higher income and savings, means your policy can have a large deductible.
• Get an estimate of costs in your region. The cost of services varies significantly, with the Northeast and West Coast being the most expensive. Insurers price policies based partly on expected future claims, so regions with higher caregiving costs lead to higher premiums.
• When building your own IRA4Income approach, request a plan that considers LTC costs. You can decide which options work best for you and make further adjustments until you have a plan that fits the needs of you and your family.
• Make sure your plans are communicated to family members or an adviser.

If you’re ready to consider an IRA4Income plan, visit Go2Income and create your own plan.

Related Content

• What if You Could Increase Your Retirement Income by 50% to 75%? Here's How
• What the HECM? Combine It With a QLAC and See What Happens
• Transform Your Retirement Plan With This Powerful Combo
• How Combining Your Home Equity and IRA Can Supercharge Your Retirement
• How Your Home Can Fill Gaps in Your Retirement Plan

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you like to oversee your own retirement planning, you have to do some homework. Most of you have gotten used to that and spend time on researching, sorting opinions and putting together the best approach for you and your family. Complicating the process is your need to address three key retirement objectives — lifetime income, liquidity for unplanned expenses and legacy for kids and grandkids. And, of course, you want to lower your taxes and have less market risk.

The product-by-product approach

Choosing among financial product options is sometimes fairly easy and is sometimes more challenging. When you’re comparing, for example, investments against guaranteed lifetime annuities, it’s not that difficult to measure market risk, tax effects and liquidity. It’s rarely an either/or decision, but rather a “how much.”

An advantage of this DIY approach is that you are in control of the decisions. The way to have confidence in your decisions, however, is to look at a plan with the options built in and then exclude those that don’t feel comfortable.

A traditional plan is a start for most retirees

Here’s an example for Sally, the sample investor we often refer to, who at 70 years old looks at her financial situation in two distinct buckets:

• Retirement savings that total $1.5 million, with half in her rollover IRA and half in her personal (after-tax) accounts
• Her home, worth $1 million with no mortgage

She may have another bucket for short-term cash needs or higher-risk investments. These are excluded for this exercise when planning for the three key objectives.

As she developed her traditional plan below, Sally has followed conventional wisdom in at least two other respects:

• She invests her retirement savings 30% (100 less her age) in equities and 70% in fixed income
• She plans to own her home without any mortgage in retirement

That’s about as simple as you can get. However, Sally realized it produces too little starting income ($68,000) vs. her 6% income goal — or $90,000 per year from her savings. (This doesn’t consider Social Security payments or any pension.) Drawing down another $22,000 to start, and increasing that annually to account for inflation, creates the risk of her running out of savings. And the $90,000 income goal doesn’t even consider the costs of long-term care and other unplanned expenses. (For more on this, see my article How ‘Home-Based Planning’ Can Address Long-Term Care Costs.)

Sally’s DIY starter plan is easy to understand, but if spending down your savings is not the answer, then how do you find the right plan design for you?

Start with a plan with the three L’s, then find the products

Begin with your goals, which for most retirees include lifetime income, liquidity for unplanned expenses and a legacy for heirs. To achieve those three L’s, your savings — including equity in your home — can be put to work in ways that Sally ignored in her plan above. Another part of the plan involves deciding which of your savings accounts you want to buy products from: tax-qualified or personal (after-tax) savings. Then, select single-purpose financial products that can be put together or eliminated to best serve your purposes.

For people who want to live in their own home as long as possible during retirement, access to home equity through a home equity conversion mortgage (HECM) is a consideration. And for lifetime income, which eases the fear of running out of money, converting some savings into lifetime income annuities provides a solution.

Those two (HECM and lifetime annuities) are not on every adviser or planner’s radar, but they should be on yours. Here’s a revised picture that shows how lifetime annuities and the value of the home add to a retirement plan. We call this an All-Asset Retirement Income Plan since it includes assets representing 90% of all asset classes.

Initial refinements to the All-Asset Retirement Income Plan

Now let’s apply these elements to Sally’s plan, which needs to be personalized for Sally’s age, gender and percentage of rollover IRA in her savings. Three important allocations are made in the refinement of this plan:

• Equity portfolios are allocated between high-dividend and growth portfolios
• The lifetime annuities are allocated between a SPIA (single premium immediate annuity) for current income and a QLAC (qualifying longevity annuity contract) for future income
• The value of the home is allocated between the HECM line of credit (with the amount determined by LOC percentages set by HUD) and the remaining equity

Sally’s All-Asset Retirement Income Plan delivers starting income of $92,000 that exceeds her objective of $90,000. She can add that extra $2,000 to her budget or reinvest it for future budgets.

Other deliverables under Sally’s All-Asset Retirement Income Plan

As you can see above, 68% of Sally’s income is “safe,” which means the income is not dependent on the liquidation or sale of investments. Even at a low market return, the plan will generate income from dividends, interest, annuity payments and drawdowns from HECM. (As part of the refinement process, planning software, such as that used by Go2Income, can test different investment returns and resulting plan outcomes.)

Her other objectives are also important, and the plan will help her achieve them:

• Liquidity. By adding the line of credit from HECM to her plan, more than 50% of her savings are liquid at the start, even with the addition of lifetime annuity payments.
• Legacy. Sally plans to live a long life, so the legacy, while delivered far in the future, equals or exceeds the original total value of savings.
• Lower taxes. Only 50% of her income is taxable through age 85. In turn, that will have a favorable impact on all of her taxable income, including Social Security and pension.
• Long-term care costs. Her liquidity is able to absorb, for example, substantial long-term care costs, with the impact felt on her legacy, not on income.
• Inflation protection. Under the starter plan with conservative return assumptions, her income grows by 1.4% per year until age 85. If inflation protection is a key objective, she can address it during the refinement process.

Of course, in order to achieve the best outcomes for Sally, she will need to speak with a financial adviser well-versed in all the elements of a diverse retirement plan. During that process, the plan can be attuned to Sally’s personal needs and desires.

You can order a Go2Income plan today based on the answers to three or four questions about your goals. Get started here with no obligation. Consult with your own qualified adviser, find an analytical tool to provide some guidance, or talk to a Go2Specialist.

Related Content

• A Different Way to Approach Your Mortgage in Retirement
• Transform Your Retirement Plan With This Powerful Combo
• Is Your Retirement Solution Hiding in Plain Sight?
• How Your Home Can Fill Gaps in Your Retirement Plan
• Annuities and Tax Planning Boost Retirement Income and More

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Deciding whether to refinance your mortgage can be a lot like playing golf. When the conditions are right and you’ve studied the course, you have a better chance at hitting a hole in one. With the Federal Reserve cutting rates for the third time at its December meeting, homeowners with higher-rate loans may finally have an opening to score some savings.

Refinancing can help you lower your monthly payment and reshape your loan to fit your current goals, whether that means switching from an adjustable-rate to a fixed-rate mortgage for more stability or shortening your term to pay off your home faster.

Before you rush to refinance, take a closer look at the full picture. Even if today’s lower rates make refinancing sound appealing, it isn’t free. Closing costs, fees and the time it takes to break even all play a role in determining whether a refinance saves you money. Understanding these expenses, and how they fit into your long-term plans, is key to deciding if refinancing is the right move for you.

The cost of refinancing your mortgage

When you refinance your mortgage, you’re getting a brand-new mortgage with a lower interest rate, possibly a different loan term and potentially from a different lender. This new mortgage pays off your original loan.

Refinance closing costs are fees and expenses related to replacing your existing mortgage balance with a new one. They typically include many of the same fees you paid when you first closed on your home loan.

National average closing costs for a single-family home refinance were $6,800 without taxes or recording fees, according to ClosingCorp (now part of Core Logic.) The fees typically add up to between 2% and 5% of the loan amount.

Here are eight types of closing costs you can expect when you refinance your mortgage:

• Application fee: $75 – $300
• Origination and/or underwriting: 1% – 1.5% of loan principal
• Attorney/settlement fee: $400 – $1,000
• Recording fee: $25 – $250 depending on location
• Appraisal fee: $300 – $500 depending on location
• Credit check fee: $35 – $75
• Title services: $300 – $2,500
• Survey fee: $150 – $400

You might be able to reduce your refinance closing costs by increasing your credit score, reducing your overall debt load and shopping around for the best lender. If you work with the same title insurance company you can ask for a discounted reissue rate.

Use the tool below to compare some of today's top mortgage refinance offers, powered by Bankrate:

Impact of refinancing for a lower rate

Whether or not it makes sense to refinance your mortgage is primarily based on whether the upfront costs of refinancing and the time period you intend to occupy the home work together to lower your monthly costs and make refinancing cost-effective. It’s usually worth it to refinance if you could lower your current rate by one percent.

This is calculated by adding up all refinancing closing costs and figuring out how many years it will take you to make up those costs with the savings from your new mortgage payment compared to your previous one. Refinancing makes more sense if you plan to stay in your home longer than the break-even point. Otherwise, you could potentially lose money.

You can calculate your own potential savings by using Kiplinger's Mortgage Refinance Calculator and determine which rate will help you get to your break-even number.

Let's take a look at two examples of the impact of lower rates on monthly payments. Our scenarios include a loan balance of $400,000, a mortgage rate of 6.5% and refinancing costs of 2%.

As the table below demonstrates, a mortgage rate decrease of 1% versus 0.5% results in widely different break-even times, thanks to number crunching assistance from The Mortgage Report.

Refinancing for a 0.25% lower rate is not generally recommended but could be worth it if you can refinance to consolidate high-interest debts, have a jumbo loan with significantly higher interest rates or are switching from an adjustable-rate mortgage to a fixed-rate mortgage.

Refinancing options before the break-even point

Remember that “breaking even” with your closing costs isn’t the only way to determine if a refinance is worth it. A homeowner who plans to move or refinance again before the break-even point might opt for either a no-closing-cost refinance or rolling closing costs into the refinance loan.

No-closing-cost refinancing typically means the mortgage lender covers part or all of your closing costs, and you pay a slightly higher interest rate in exchange. If you’re still saving enough when compared to your existing mortgage loan, this strategy can still pay off. This can be a beneficial situation for borrowers who plan to keep their new loan for only a few years.

You can also roll the closing costs into the refinance loan. If you're cash poor and going to keep the loan for more than a few years, rolling closing costs into the loan amount may be more affordable than a no-closing-cost loan with a higher interest rate.

Making the decision to refinance

When deciding to refinance, look closely at all of the numbers and how they impact your monthly costs. You also need to consider costs over the life of the loan or the time period you intend to live in the home if you plan on selling in the near term. Because if your new interest rate isn’t low enough, you might actually pay more interest in the long run because you pay it for a longer time.

Evaluating the impact of your credit score on how much your new loan will cost can also help you determine the right time to refinance. When you can’t qualify for an interest rate that’s lower than your current loan’s rate, consider improving your credit score before applying.

Relayed Content

• Mortgage Calculator: Find Your Monthly Payment
• What Home Equity Is and Why It's a Valuable Long-Term Investment
• How Does the 10-Year Treasury Yield Affect Mortgage Rates?
• How the Federal Reserve Affects Mortgage Rates and What It Means for Homebuyers in 2025

Editor’s note: This is part seven of an ongoing series throughout this year focused on helping older adults navigate the financial difficulties of gray divorce. See below for links to the other articles in the series.

The subject of reverse mortgages is often met with skepticism from clients. A person going through a late-life divorce might even be perplexed by how a reverse mortgage might offer a potential solution to the financial stress of divorce.

I understand. Until recently I always associated reverse mortgages with late-night television infomercials, a product pitched by actors like Tom Selleck or Henry “The Fonz” Winkler. I had always lumped them in as something that was sold like a timeshare, variable annuities or indexed universal life insurance.

My research working with Certified Divorce Lending Professionals (CDLPs) and older divorcées has convinced me that the reverse mortgage can solve some key problems in gray divorce.

Most, but not all, reverse mortgages today are federally insured through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) Program and are available for homeowners ages 62 and up. Let’s review the key features of a HECM and how it might benefit late-life divorcées.

No monthly mortgage payment

HECM borrowers are not required to make monthly mortgage payments. The loan, which grows over time, is repaid when the homeowner sells the house, moves out or passes away. This can reduce financial strain for divorced clients living on a fixed income or facing uncertainty about future cash flow.

Unlike traditional mortgages, the borrower’s income and credit score aren't as important as their age and equity in the home. Borrowers with lower credit scores may have to pay a higher interest rate.

Home equity access

Divorce usually involves dividing assets, including the marital home. Reverse mortgages allow older homeowners to convert part of their home equity into tax-free cash, helping divorcées who need liquid assets to buy out their spouse’s share of the marital home or to fund new living arrangements without selling the home.

To qualify, in addition to being 62 years of age or older, you must own your home fully or have a low mortgage balance and meet HUD’s financial requirements.

Additional income stream

The proceeds from a reverse mortgage can supplement income, helping to cover living expenses and health care costs. Chris Bruser, a reverse mortgage specialist with Mutual of Omaha in Tampa, notes, “A divorced person may have had their net worth cut in half in divorce. The HECM helps preserve those investment assets by eliminating mortgage obligations. Those assets can be used to generate income from investments.”

Eligible borrowers qualify to receive disbursements either as a lump-sum payment, monthly payment or line of credit.

Non-recourse loans

Insured by the FHA, HECMs are non-recourse loans, meaning that the borrower or their estate will not owe more than the value of the home when the loan is repaid. The FHA guarantees that the loan will be repaid if it ever goes into default, so lenders are willing to offer HECM loans with low interest rates and flexible terms.

The HECM has been reformed over the years. One reform restricts the amount of funds available to a borrower, and another introduced underwriting requirements through a financial assessment. These reforms have coincided with a reduction in the rate of tax and insurance default before and after the reforms.

Bruser notes, “The HECM program has improved dramatically over the last 15 to 20 years, to ensure its longevity and utility for our aging population. After a basic consultation, a lot of the stigma goes away.”

Consider two potential solutions the HECM may solve for homeowners getting divorced later in life:

1. The marital home remains with one spouse.

A HECM on the marital home can provide the necessary funds for the departing spouse’s down payment on a new home.

John Drennen, a Certified Divorce Lending Professional with VIP Mortgage in Las Vegas, says, “Let's say we have a 70-year-old couple divorcing with a free and clear house and the man wants to stay in the house, and he doesn't have a lot of income. He can do a reverse mortgage to access the equity in the house to give to his wife, who can use that money as a down payment on the purchase of a place for herself, possibly using a HECM for the purchase of her new home. Neither spouse is saddled with debt-service obligations, and there's no forced sale of the marital home.”

2. The marital home is sold.

In this case, the proceeds would be divided. Each spouse could then use their share of the proceeds toward the down payment on a new home purchase and then use a home purchase HECM to pay the rest. Once again, neither spouse has a debt-service obligation. Nor is there the need to draw down liquid assets from bank or investment accounts.

Drennen notes an even more creative option where one spouse purchases a duplex or a fourplex with a HECM and lives in one unit and rents out the others to boost cash flow.

When a reverse mortgage isn't a good idea

Of course, a reverse mortgage is not always advisable. If the homeowner plans to move soon, the upfront costs involved in setting up a reverse mortgage loan may not make sense. While the HECM may provide more options than a traditional mortgage, including no mortgage payments and potential growth of a credit line of unused funds, the reverse mortgage is still more expensive than a traditional mortgage.

Also, if the homeowner is intent to leave an equity-rich home to their heirs, they may want to consider alternative arrangements.

Another consideration is eligibility for government benefits. While the proceeds from a reverse mortgage are not considered taxable income, they can affect eligibility for certain government assistance programs, such as Medicaid. It's important to understand how a reverse mortgage might impact eligibility for these benefits.

Drennen, pointing to the common misconception that with a reverse mortgage you no longer own your home, suggests homeowners reframe their approach: “When you buy a car, do you go and tell your best friend, ‘Hey, I just financed a Ford F-150 with Ford Credit’? No, you say, ‘I bought a new Ford F-150.’ You own your vehicle; you owe the bank. It’s the same with a HECM. You own the house; you owe the bank.”

I work with divorce lending professionals who specialize in helping older divorcées. If you are going through divorce and you’d like to learn more, please email me at andrew@wiserdivorcesolutions.com for a free consultation.

Other Articles in This Series

• Introduction: Happy New Year: Let’s Get a Divorce
• Part one: How Does a Gray Divorce Affect Social Security Benefits?
• Part two: In Gray Divorce, Two Financial Planning Yardsticks Are Key
• Part three: Don’t Forget to Update Beneficiaries After a Gray Divorce
• Part four: What Is a Lifestyle Analysis in Divorce?
• Part five: How Much Will Getting Divorced Cost You?
• Part six: Think of Prenups and Postnups as Financial Planning Tools

Related Content

• How to Add Home Equity to Your Retirement Income Planning
• Is Your Retirement Solution Hiding in Plain Sight?
• Should I Get a Reverse Mortgage? Six Questions to Ask First
• Five Tips if You’re Getting Divorced in 2024
• How Finances Are Split in a Gray Divorce

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Let’s talk about how nature inspires planning for retirement income.

Somewhere in the primordial past, hydrogen and oxygen atoms came into being. They were fine as stand-alone elements, but they really showed their value when they combined as H2O to become the useful substance we know as water.

In the same way, combining seemingly unrelated retirement products that come on the market at different times may produce some surprising results.

The retirement big bang

First, Congress in 1987 created the HECM, for home equity conversion mortgage, which enables homeowners 62 and over to create additional income and liquid savings from the value of their home.

Second, the IRS adopted regulations in 2014 to permit a type of deferred income annuity called a QLAC, which enables IRA holders to defer required minimum distributions (RMDs) from their accounts, and therefore defer taxes, while providing guaranteed lifetime income starting no later than age 85.

Despite the tax and product feature advantages, neither has attracted a large share of retirement planning interest when offered on a stand-alone basis.

However, when HECM is combined with QLAC, a transformation occurs that, while not the stuff of life-preserving water, could provide the income and financial liquidity to make the difference in a retiree’s retirement finances. We call it H2I, for HomeEquity2Income.

How HECM and QLAC work separately

A QLAC, in addition to the tax savings of deferring RMDs, provides guaranteed lifetime income and the flexibility to select the date annuity payments begin and the income pattern you want. For example, our sample investor (female, age 70) can use the maximum QLAC amount of $200,000 and purchase $70,000 per year of lifetime income starting at age 85. (Visit our QLAC calculator to get a free quote to evaluate these options.) While QLAC provides substantial longevity protection, purchasers give up access to the QLAC reserve. In other words, they can’t access the money they spent to purchase the QLAC and have to wait for annuity payments.

A HECM gives homeowners 62 and over access to the value of their home in the form of regular tax-free income and a line of credit, without selling or renting the house they’ve lived in for years. While there is no requirement to repay the mortgage loan balance or even loan interest, too much borrowing can reduce the line of credit later in retirement, when there could be significant long-term care costs and a reduction in any legacy from the house passed on to heirs. HECM rules prohibit using the amounts borrowed to purchase an annuity product.

HECM and QLAC could have continued in their own orbits, except conditions here on Earth have changed over the past decade or two, bringing a perfect opportunity for the combination of the two products.

During the period from the launch of HECM:

• Home values increased by nearly 300%
• Longevity increased by 2.5 to 4.5 years (pre-COVID)
• Cost of long-term care insurance increased by up to 400%
• Pensions mostly disappeared, now covering only 15% of private-sector workers
• Higher Social Security benefits created higher tax rates

How to think about a combination

When QLACs came on the scene in 2014, they appeared to be a natural addition to retirement income planning, and we figured that there’d be a meet-up with HECM during this process. However, the industries of mortgages (HECM) and annuities/insurance (QLAC) work in silos. They don’t see each other or talk about how they might together benefit the consumer. Unlike with H2O, though, we didn’t need an asteroid to crash into Earth to bring about change.

The way to combine is more art than science. It starts with meeting retiree objectives around income, liquidity and legacy. And income is further defined by lifetime payments, low taxes and low risk. Liquidity is defined by the ability to have access to savings to cover unplanned expenses. For retirees, that’s likely to be expenses related to long-term care or modification of your home for those who want to age in place. Legacy is self-explanatory — it’s what you leave to a spouse or beneficiaries after loans are paid off.

Importantly, the HECM/QLAC combination must be aided by a planning methodology that looks at all major asset classes while attempting to make planning understandable to investors and planners alike. In our case, we began to look at how best to include the equity in the home with savings from a rollover IRA to meet these retiree objectives.

What are the considerations in designing H2I?

While you might adopt different criteria in defining the combination, here are the ones we used:

• Meet governmental regulatory constraints
• Make it understandable to the market
• Deliver outcomes matched to retiree objectives

The first challenge is that the regulatory world wants to keep certain products separate — for various reasons — while a real-life person wants to see a total plan and not one made of two or more components separately managed. The answer comes through a planning method that combines these components and an implementation that is, unfortunately, separate.

The second challenge is to make that plan understandable. While different approaches are possible, our view is to share easy-to-understand graphics, based on deterministic assumptions, and focus on retiree objectives, rather than focusing on product components. In addition to all the technical questions being answered by product experts, the planning should answer this question: “What does it do to my plan for retirement income?”

The third challenge is meeting the retirement objectives and to recognize how they change based on life stages. As we said above, the basic retiree objectives include:

• Income. Meet budget, be predictable and last a lifetime
• Liquidity. Focus on larger amounts in middle stages of retirement
• Legacy. Provide funds for surviving spouse and then for beneficiaries
  

Meeting retiree objectives

Set out below is the plan presented to our sample investor, a 70-year-old female, with $1 million in the value of her home and $1 million in her rollover IRA. She wants more income plus liquid savings to address long-term care costs. She considers an H2I plan but is also aware of her option to subsequently insert H2I into a Go2Income plan.

1. Income objective

Her income from H2I comes from two sources:

• During Stage 1, she is drawing tax-free amounts from her HECM line of credit.
• During Stage 2, her income comes from QLAC annuity payments, after paying tax-deductible interest on HECM.

H2I planning creates a seamless income connection between Stages 1 and 2. She can spend this income any way she wants, add to her investments, or use it to buy health, LTC or life insurance as part of her planning.

2. Liquidity objective

During Stage 1, her liquidity in the form of a line of credit (LOC) starts at $330,000, grows with a HECM interest rate, and then is reduced as her loan balance grows from her drawdowns and interest.

After Stage 1, the LOC grows dramatically when drawdowns stop and interest is being paid via QLAC payments.

3. Legacy objective

Her legacy from H2I is the value of her home less the loan balance on the HECM. The gain or loss vs. the original value of the home is the market appreciation less the loan balance. In Stage 2, with interest being paid, the legacy grows dramatically. If the appreciation is reduced by half, however, the amount passed at 95 will be reduced from $2 million to $1 million.

4. Long-term care objective

Like a lot of retirees, our investor hasn’t purchased LTC insurance and is relying on her retirement savings to cover the cost of nursing or other costs. She is thinking she might have to downsize or sell her home. With H2I, she may be able to avoid that. To illustrate, if she needs an additional $75,000 per year for nursing care starting at age 85 and continuing for 5 years, she can pull that from H2I and still pass $1 million to her heirs at age 95 — and have a line of credit if costs are higher. All the while, she can be aging in place. See the example below that captures income, liquidity and legacy in one graph, while also reflecting home care costs.

H2I as part of a complete retirement income plan

H2I is an approach that helps retirees access the 25% to 40% of their net worth that homes in many cases represent. That’s an asset that can allow you to stay in your home, even when the cost of long-term care for a married couple might average as much as $750,000.

You won’t hear about HECM and QLAC from most financial advisers or planners. That’s because they focus on splitting retirement assets among different buckets, like stocks, bonds and cash. If they consider equity in your house, it’s the cash you get after selling it.

Your next step could be just to consider how H2I might benefit you and your family. It could also become a core component of a holistic retirement approach (Go2Inome) that considers all your assets and how they best fit together. As we pointed out in our previous article, Things Change: Is It Time to Update Your Retirement Plan?, here’s how H2I could fit into your plan.

In the grand scheme, H2I is not more important than H2O. But for retirees, it’s a pretty good leap forward. We know that most retirees want lifetime income, liquidity and legacy. Combining two products — QLAC with HECM — can provide that retiree trifecta.

Visit Go2Income Personal Planning to start a plan risk-free. You can ask one of our analysts to help you make adjustments, and then decide whether you want the peace of mind that lifetime income and greater liquidity can provide.

Related Content

• Is Your Retirement Solution Hiding in Plain Sight?
• How to Add Home Equity to Your Retirement Income Planning
• How Your Home Can Fill Gaps in Your Retirement Plan
• Annuities and Tax Planning Boost Retirement Income and More
• How a Fixed Index Annuity Can Manage Retirement Income Risks

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Unless you have done zero work on retirement, you have a plan. It may be outdated, formal or informal, producing good results or not. But you have a plan.

Then you start to think about all that has happened in the world — and how your objectives may have changed — since you set up your “plan.” The holes probably loom large in your imagination, but there will be improvements that you can take advantage of, too, if you recognize them.

For one thing, the longer you live in your house, the more equity you have, barring emergencies. Current interest rates and inflation may seem alarming, but higher interest rates can also bring you more income from annuities. And keeping taxes lower in retirement is more likely when you employ the tools now at your disposal just because you’ve lived a little longer and saved a little bit more.

Designing the plan that best fits you

Start by thinking about your own wants and needs. There’s no reason to be intimidated. You know your objectives better than anyone. You also know your budget requirements, and also what your kids may need, and even whether you’re an “age-in-place” person.

Decide what’s most important to you. It could be tax reduction, the amount of guaranteed income or having liquid funds to pay for long-term care, a critical health crisis or another kind of emergency. You probably have in mind a number for starting income and whether you plan to leave a legacy to heirs. And perhaps you want to put off taking Social Security benefits as long as possible, or ensure continuity of income to your spouse. Finally, factor in your thoughts about the future of inflation and stock market performance.

The challenge is how to go from your current plan to one that meets your new thinking. Here’s a way to think about the process while at the same understanding more clearly what each step brings.

Starting with a traditional investment-only plan

Set out below is how a typical asset-focused plan might look. The plan is generating dividends and interest and using IRA withdrawals for current income and protects itself against large market losses by a low 30% allocation to stocks.

As you rethink your objectives, your new plan will begin to unfold. The order of steps above represents one set of personal objectives and just one way to implement that new plan.

Adding income annuities to the mix

In considering the next stage, you will see that income annuities can provide more income, lower your taxes and reduce your income risk.

For instance, IRS rules allow you to take $200,000 from a rollover IRA account and purchase a QLAC, a type of deferred income annuity that is designed to begin producing payments as late as age 85.

Income for today comes with a single-premium immediate annuity (SPIA), purchased with already-taxed savings to create a larger income stream without large additional taxes.

This is a logical and straightforward decision, replacing some of the fixed-income investments with income annuities.

Adding HECM to provide more income and liquidity

The next step: Add a home equity conversion mortgage, or HECM, to provide more income and, most important, a line of credit that grows over time. Under IRS rules, both sources of cash are considered loans and are not subject to federal income tax. If you end up needing money to pay for health care costs not covered by insurance, your HECM line of credit should cover it or give you a good start.

Under HomeEquity2Income, or H2I, HECM and QLAC are combined so that QLAC payments will pay for the HECM interest as well as provide income after age 85.

Now we have a plan that has attractive income and liquidity.

Final adjustments to balance market risk

Final step: With these two new asset classes in place, consider what level of risk you might assume in your split between fixed income and stock investment portfolios. With your greater security of income and lower taxes, you can increase the allocation of the stock portfolio in personal savings to high-dividend stocks, providing yet more income. The growth portfolio in your rollover IRA will provide potential for higher withdrawals.

Note that while this plan is apparently more aggressive, there is a lower-percentage allocation to stocks.

Other steps to consider

When you have more spendable money, you have additional options. You may decide to allocate a portion of your IRA withdrawals to a Roth IRA for tax purposes. If you have grandkids, a 529 plan awaits for funding college educations. You will have other options, too.

When you’re done, the new plan may still have some elements of the old plan, but the updates will allow you to more easily meet your goals for retirement income, liquidity, legacy and taxes.

Get started at Go2Income

Take the first step with a visit to Go2Income and start building a plan that considers income, taxes and long-term goals. The exercise is flexible, and when you have questions, schedule time with a Go2Specialist, who can answer all your questions.

Related Content

• Annuities and Tax Planning Boost Retirement Income and More
• Is Your Retirement Solution Hiding in Plain Sight?
• The (R)evolution of Retirement Income Planning
• How a Fixed Index Annuity Can Manage Retirement Income Risks
• Retirees: Worry Less About Markets, Long-Term Care and Taxes

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Editor’s note: The earlier article How Your Home Can Fill Gaps in Your Retirement Plan discussed the “why” of incorporating the equity in your home in your plan for retirement income. This article discusses the “how.”

In retirement, your home means something more than it did while you were raising kids, getting promotions at work, and dreaming about how the future might unfold.

Now, it can provide the opportunity that helps you realize your future in retirement — financially at least.

For most of us, our house carries much more equity than it did when we were just starting out. Home prices have more than doubled in the past 20 years. How to use that equity to benefit you and your family is a key retirement question that your home can answer. But as you will see, it may work better when combined with an annuity contract that produces late-in-life income.

Combining two financial products in the right proportions

I pointed out in my earlier article For Sustainable Retirement Income, You Need These Five Building Blocks that hydrogen and oxygen have their own good properties, but they create the magic of water (also known as H2O) only when combined in the right proportions. In a similar way, the combination of a home equity conversion mortgage (HECM) and longevity protection in the form of a QLAC, or a qualifying longevity annuity contract, in a new program we call HomeEquity2Income (H2I) provides a beneficial mix of an immediate income boost and additional long-term liquidity. H2I can be the “solution” to pay for both planned and unplanned expenses.

H2I uses the equity in your home, accessed through an HECM, a type of reverse mortgage backed by the Federal Housing Administration (FHA), that enables homeowners age 62 or older to convert a portion of their home equity into cash, as a source of tax-free drawdowns early in retirement until age 85. Then payments from a QLAC (or another deferred income annuity contract) start at age 85 to pay HECM interest and continue the income for life.

Payment of interest is not an HECM requirement (more on this below); paying the interest from QLAC payments is simply a way to grow a line of credit and liquidity for the future.

Note: The stock traders’ technical definition of financial liquidity refers to the ease with which an asset or security can be converted into cash without causing a significant impact on its market price. In this case, the definition of liquidity is the ability to access funds for unplanned expenses without upsetting your plan for retirement income. It could be that your liquidity is the “set aside,” or reserve, fund, the money market fund or equity in your home that’s convertible into cash to cover say, health care expenses or 529 contributions.

A little more about the components of H2I

There are a lot of financial products out there, and we have studied most of them. As I suggested above, most will not interact with others in a way that produces a better fit to meet your objectives. Here’s how we determined the elements that would work in H2I.

A QLAC works because it is designed to produce lifetime income from a rollover IRA account (but not later than your age 85), which means you’re deferring otherwise taxable required minimum distributions (RMDs) and purchasing income at a deep discount. As important, the income kicks in to pay your HECM interest and continue your age 85 income the HECM was providing — for the rest of your life. They fit like hand and glove. Visit our calculator to see how you much lifetime income a QLAC will guarantee.

There is a virtual clone of a QLAC that you can purchase from your personal (after-tax) savings called a conventional deferred income annuity (DIA). If the $200,000 limit on a QLAC restricts your H2I benefits, you can purchase a DIA to fill in the gap.

Like other income annuities, your income under a QLAC/DIA is a function of age, gender and whether a surviving spouse receives income. One other option is to protect your beneficiary in case of early passing.

An HECM is the element that binds with a QLAC to make H2I. Several advantages make it a good fit, enabling the homeowner to convert a percentage of home equity into tax-free cash. The benefits include:

• No required monthly principal and interest payments
• Borrower or heirs won’t owe more than the appraised value of the home at the time of repayment
• The FHA insures HECMs

Let’s pause here for a short discussion of HECM vs HELOC (home equity line of credit). Retired homeowners may be thinking that they can delay establishing a line of credit from the value of their home until they actually incur large expenses, but they risk waiting until it’s too late. With a HELOC, lenders often consider the borrower’s age along with creditworthiness and what you owe on the house. If you’re 62 or over, age is not a consideration with an HECM, which also offers a line of credit that grows each year based on the mortgage’s interest rate. Finally, HELOC requires payment of interest; not so with HECM.

How does H2I work for our sample investor?

Let’s look more closely at the example of this “water” of retirement income planning for a typical retiree or near retiree. Her net worth is $2.5 million, with $1.5 million in retirement savings and $1 million in the value of her home. She really loves her home and doesn’t want to sell. She wants to age in place, recognizing that a home health aide probably costs $60,000 a year or more. That’s a good reason to have a source of liquid funds available. If she needs in-home care, she can pay for it. If she stays healthy, she can leave the equity in her home to grow.

With that knowledge, here's what one customized H2I program provides in comparison to our investor’s current plan.

Income. H2I will provide about $17,200 a year from HECM drawdowns until age 85, when a QLAC will begin, replacing that income and also paying the interest on the loan balance. Our investor can use the $17,200, which is received income tax-free, on expenses or reinvest it in a tax-favored account that she expects to grow over time. As an alternative to using the $150,000 to purchase a QLAC, she could keep that amount in her IRA account and pay out RMDs. After tax, that’s generating about $4,300 to start.

The H2I income translates to 11.5% per year on the $150,000, tax-free until age 85 vs. about 2.85% from her rollover IRA account. Of course, if she tried to match the 11.5% from her current rollover savings each year, the account would shrink more rapidly than she planned

Liquidity. With the income boost and tax benefits, what about liquidity in her new H2I program?

To start, HECM provides tax-free liquidity from a line of credit, and under her H2I program, it will grow from $340,000 to $580,000 at age 85 to use as she sees fit. That liquidity grows even faster after age 85 with the payment of interest, exceeding $1 million by age 90. Importantly, that line of credit grows regardless of the appreciation of the home.

Under her current plan, while her home is growing in value, there is no automatic liquidity unless she set up a HELOC in advance.

Is it a good deal?

Compare the legacy. An H2I plan provides more income and greater liquidity at the expense of a lower legacy payoff to the kids because of income generated earlier in retirement. However, they will appreciate that you took on the burden of your health care and other costs. And you also may use some of the line of credit to finance things, like your grandchildren’s college expenses.

To do the full analysis of the pros and cons of H2I, you really need to look at your total plan. A future article will show the value of combining H2I with Go2Income.

Visit here to create your own Go2Income Plan. After you have a chance to review that plan, you’ll be able to appreciate how adding H2I can prepare you for the future.

Related Content

• How to Cut Your Taxes as Short-Term Interest Rates Come Down
• How a Fixed Index Annuity Can Manage Retirement Income Risks
• A Challenging Retirement Plan Mission: Not Impossible
• Retirees: Worry Less About Markets, Long-Term Care and Taxes
• Annuity Payments Are 30% to 60% Higher: Time to Reconsider

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Most retirement planning methods have ignored what for some retirees is their largest single asset — their home. That means the plan may fail to deliver on one or more of the five things retirees want:

• Don’t run out of money
• Grow income each year
• Leave a meaningful legacy for kids and grandkids
• Increase spendable income by reducing taxes
• Build up a source of liquidity for unplanned or unfunded expenses

With the addition of the new HomeEquity2Income (H2I) program described in this article, Go2Income now covers over 90% of all retiree asset classes. H2I uses the equity in your primary residence to fill in the gaps in your plan that otherwise might require insurance that you don’t qualify for, higher-risk investments, or more aggressive assumptions as to yields and returns in your plan.

Starting with this article and continuing over the next month or so, we’ll cover the why, what, and how of the HomeEquity2Income program.

First, the “why” of H2I.

Overlooked area of wealth

One major area of wealth for retired investors is the value of their residence, less any mortgages or home equity loans. A report by the Joint Center for Housing Studies of Harvard University shows that for high-income retirees, an average of 23% of their personal wealth resides in the value of their primary residence. Put another way, there is $47 trillion in total home value, according to Redfin — and that is up 19% from two years ago. Higher-value homes worth $250,000 to $750,000 posted the largest gain of 4% in the last year.

The issue is whether to unlock that value and, if so, how best to do that. There are multiple ways to unlock, like selling or renting the house, a home equity loan (HELOC) or a home equity conversion mortgage (HECM). Our planning view is to consider, where possible, all major asset classes available to the retiree; however, selling or turning your home into a rental property is beyond our pay grade.

Regarding HECM, while I understand a built-in reluctance to mortgage (either forward or reverse) your primary residence after retirement, it’s an option that can address several worries about income, long-term care and staying in the home you love.

What is an HECM, and what does it offer a homeowner?

The term HECM is still not widely recognized, and the purpose of the product is not always understood. Plenty of definitions exist, but for the most up-to-date, I consulted with our artificial intelligence tool, ChatGPT. Here’s what it says:

A home equity conversion mortgage (HECM) is a type of reverse mortgage backed by the Federal Housing Administration (FHA) that enables homeowners age 62 or older to convert a portion of their home equity into cash.

• HECM allows homeowners to access a portion of their home equity without needing to sell their home or make monthly mortgage payments.
• Homeowners can choose how they receive the funds from the HECM, whether as a lump sum, monthly payments, line of credit or a combination of these options.
• Unlike traditional mortgages, borrowers are not required to make monthly payments. The loan is typically repaid when the homeowner sells the home, moves out permanently, or passes away.
• HECM loans are insured by the Federal Housing Administration, providing additional protection to borrowers.
• Borrowers can continue to live in their home as long as they meet the loan obligations, such as maintaining the property and paying property taxes and homeowners insurance.
• HECM loans are non-recourse loans, meaning that the borrowers or their heirs will never owe more than the value of the home at the time of repayment, even if the loan balance exceeds the home's value.

HECM funds can be used for various purposes, such as supplementing retirement income, covering medical and long-term care expenses, home renovations or paying off existing debts. (ChatGPT’s words, but my emphasis.)

As to the first point, HECM can be set up to provide periodic cash flow to the investor — and that can be tax-free. Properly designed interest paid on a line of credit can be tax-deductible.

Thus, an HECM offers a way to access home equity to improve your financial situation without the burden of monthly mortgage payments. Still, I would consider it only one option in retirement planning, not the sole solution.

Unmet needs in planning

In earlier articles, we’ve discussed unmet needs and wants that occur even with the most diligent planning. For example, very few plans fully contemplate the costs of an extended health crisis. According to Genworth Financial, an insurer that does regular surveys on the expense of long-term care, you can expect to pay monthly costs of at least $1,690 for adult day health care, $5,148 for a home health aide and $9,043 for a private room in a nursing home facility. That last type of care costs more than $100,000 per year.

As regards the wants, with the price of college skyrocketing, you may decide to fund more of these costs for your grandkids through your 529 plan. And then there are the costs of renovating or modifying your residence if you, like most others, want to “age in place.”

An example of this planning dynamic is the family we visited on Thanksgiving in my article How Finances Can Improve for Retirees — and the Next Two Generations. That family thought they had a plan worked out to serve the interests of three generations, until they investigated long-term care insurance and realized how expensive it is. Every family contends with both current and future unmet needs. The difference is in how you approach them.

Before we describe how we assembled the H2I solution, I will again list the why:

• Equity in your home is an overlooked area of wealth
• HECM can be a suitable component in your plan
• You should plan for unmet financial needs and wants

Create the H2I solution

Our new approach, called HomeEquity2Income, or H2I, can become (1) a source of additional retirement income that is lifetime, tax-efficient and safe and (2) create additional liquidity late in retirement. It can work either as part of a Go2Income plan or as a stand-alone H2I program.

At Go2Income, we discovered that for optimal efficiency, we should combine lifetime annuity payments with an HECM for tax-free drawdowns early in retirement and include a line of credit for later-in-retirement unplanned expenses. We also realized that, with a properly designed approach, we could address multiple regulatory issues.

You get one thing — liquidity — with an HECM. You get another — lifetime income — with an annuity. One particular annuity that we favor is a QLAC. Visit our QLAC calculator to get a free quote.

When you put them together, the combination provides lifetime income and the cash resources you might need to pay for expensive outlays like health care not covered by Medicare.

As usual with Go2Income, you get to choose the combination that best suits you and your family.

The benefits that H2I generates

In future articles, I will discuss how to use H2I as a stand-alone program and then how to integrate it into your Go2Income plan. Before we end this article, let me give you an example of the benefits H2I delivers for our typical investor — a 70-year-old woman with $2 million in savings and $1 million in home equity.

• $20,000 of tax-free cash flow growing to $27,000 by age 85
• $27,000 of lifetime income at 85
• $700,000 of liquidity at age 90

To repeat myself, your circumstances and solutions will be different. But you can get started now. Order your own complimentary Go2Income plan to learn more about how to use the equity in your residence to create more retirement income and to create a new source of liquidity.

Related Content

• How a Fixed Index Annuity Can Manage Retirement Income Risks
• A Challenging Retirement Plan Mission: Not Impossible
• Retirees: Worry Less About Markets, Long-Term Care and Taxes
• Annuity Payments Are 30% to 60% Higher: Time to Reconsider
• Don’t Bet Your Retirement on Stocks: Follow These Four Tips

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

A debt-free retirement has been the ideal scenario for so long that older adults often overlook a valuable financial resource: their home. Collectively, homeowners age 62 and older have a record $6.5 trillion of “tappable” equity, according to data analytics firm Black Knight. Individually, home equity accounts for more than a quarter to almost half of the median net worth of retirees, depending on age, according to the Federal Reserve Bank of Philadelphia.

Many financial planners believe tapping that wealth in retirement or just before makes sense if done wisely for the right reasons. For instance, the money can be used for some laudable goals: to pay off higher-priced credit card debt, remodel a home with features to help you age in place, delay taking Social Security until you qualify for the maximum payout, buy long-term care insurance or pay the tax bill for a Roth conversion. Your home’s equity might be the lifeline you need to avoid drawing from your investments during a market downturn or taking on more portfolio risk to make up for any investing shortfalls.

The ultimate way to cash in on that equity is to sell your home and downsize or rent the next one. But most retirees don’t want to move, and even if they do, downsizing in today’s heated housing market presents its own challenges.

The alternative is to borrow from your home equity with your home as collateral. You can refinance an existing mortgage and take cash out, borrow with a home equity loan or line of credit, or apply for a reverse mortgage. Each option comes with opportunities, limits and costs.

Lenders can’t discriminate against you based on your age, but you must prove you have the income and assets to repay a loan. A lender will ask for documentation including copies of award letters (for Social Security or a pension), payment stubs, recent savings or investment account statements, and 1099 forms for the past two tax years. Lenders generally want to see a “two-year history and three-year future” for most income sources, according to LendingTree.

Generally, borrowers with higher credit scores and lower loan-to-home-value ratios get the best rates. Reverse mortgages work a bit differently, requiring underwriting but not a credit score.

No matter how you tap your home’s equity, you’ll pay closing costs including the lender’s origination fee plus fees for third-party services, such as the appraisal, title work and recording the lien with the county. The fees can be paid out of pocket or rolled into the loan. You’ll have a three-day cooling-off period after closing in case you change your mind.

Cash-Out Refinancing

Most seniors with home equity to tap are candidates for refinancing because the rate on their first mortgage is significantly above the market average, according to Black Knight. By refinancing, they can improve their rate and take cash out. In a cash-out refinance, the existing mortgage is replaced with a new larger one that reflects the home’s current appraised value. You can take cash out of the difference up to a limit.

In mid-September, the national average fixed rate hit an all-time low of 2.9% for 30-year mortgages and 2.4% for 15-year mortgages with a 0.8 and 0.7 mortgage point, respectively, according to Freddie Mac. The rate on a cash-out refinance will be about an eighth to a quarter of a percentage point higher than for a no-cash-out refinancing, says Adam Smith, a mortgage broker in Denver.

If you want to refinance, don’t delay. Mortgages backed by Fannie Mae and Freddie Mac that close after Dec. 1 will be more expensive. To cover projected losses from the pandemic, the federally backed home mortgage companies will add a 0.5% fee to the interest rate on conforming loans (those less than $510,400, or $765,600 in high-cost areas in 2020).

Lenders will let you borrow up to 80% of your home’s value, including the new mortgage and the cash you take (75% for a second home or investment property). With a loan-to-value ratio of 80% or less, you’ll avoid the cost of private mortgage insurance. If you have any other home equity debt, you must pay it off or roll it into the new mortgage up to the limit.

Your monthly mortgage payment including the principal, interest, property taxes, hazard insurance and any homeowners association fees should consume no more than 28% of your monthly gross income.

Closing costs are typically 2% to 6% of the new loan amount. Use the TriRefi calculator to determine whether it’s better to pay out of pocket or roll the cost into the loan or interest rate.

Home Equity Borrowing

A home equity loan, also called a second mortgage, provides a lump sum payout that may work well for a one-time expense, such as a specific home project or car purchase. It offers the predictability of a fixed rate of interest and repayment in equal monthly payments over a term of five to 20 years.

A home equity line of credit is a revolving line of credit that you can tap whenever you like by using a check, a credit or debit card connected to the account, or an electronic transfer. You’ll incur a variable rate of interest on any outstanding balance. You could use the HELOC to pay for completed phases of a remodeling project or ongoing or variable expenses, such as medical bills, or just keep it available for an emergency.

Be aware that lenders may reduce, freeze or cancel lines of credit if they anticipate or experience a rising number of defaults, as they did during the Great Recession. Despite the pandemic-related economic uncertainty, lenders haven’t yet curtailed borrowing for existing lines of credit, says Keith Gumbinger, vice president at HSH.com, a financial publisher. However, JPMorgan Chase and Wells Fargo stopped taking applications for new HELOCs this past spring and had not resumed by mid-September.

Some lenders have tightened lending standards, requiring a higher credit score or reducing the loan-to-value limit for all mortgage and home-equity debt from 80% to 75%, says John Garcia, director of consumer loan processing at Boeing Employees Credit Union in Seattle. Don’t wait to apply until your home is under construction, unoccupied or for sale, or has lots of deferred maintenance or damage because it will no longer qualify as collateral, says Garcia.

HELOCs provide an initial withdrawal period, usually 10 years, when you can borrow up to your limit. During that time, you may choose to make a minimum payment—typically 1% to 2% of the loan balance—or an interest-only payment if you qualify. You can usually prepay more without penalty. As you repay principal, your available credit is replenished.

Many lenders offer a “loan within a line” type of HELOC. During the draw period, you can convert all or part of your outstanding balance from a variable to a fixed rate, usually a limited number of times, and repay that portion over a term of up to 20 years.

After the draw period ends, you must begin making principal and interest payments, typically over 10 to 20 years. Look for a fully amortized repayment plan that will completely pay off your balance by the end of the term, without requiring a balloon payment. If you pay only interest throughout the draw period, you could get hit with a substantially larger payment. To avoid that, pay off the balance in full or refinance into a new HELOC before the repayment period begins.

In mid-September, the average fixed rate for a home-equity loan with a 10- or 15-year term was 5.7%, and the average variable rate for a HELOC was 4.8% (with a loan or line amount of $30,000, a FICO score of 700 and a combined loan-to-value ratio of 80%), according to Bankrate.com.

Some lenders will offer a lower, introductory HELOC rate to qualified borrowers. Make sure you know how long it lasts and what your new rate will be when the introductory period ends. You may qualify for a discount of 0.25% or 0.5% on the rate if you already have or open a deposit account with the lender, sign up for automatic payments or agree to pay an annual fee of, say, $50. Look for a rate cap to keep borrowing costs manageable.

Closing costs for a home equity loan or line of credit can run about 2% to 5% of the loan amount. In exchange for a “no-cost” offer, you’ll either pay a higher interest rate, or the lender will impose a penalty if you close the loan or line prematurely. Pay special attention to miscellaneous fees for such things as inactivity or a minimum balance.

Begin shopping wherever you currently have a bank account, but check other lenders for current rates and offers or request personalized quotes. Then use calculators at bankrate.com, hsh.com or lendingtree.com to run what-if scenarios.

How Reverse Mortgages Work

To tap their home equity, Ray and Anne Smith, of Jasper, Ga., refinanced into a reverse mortgage this past spring. The Smiths, who are in their 70s, draw Social Security and have an IRA, but took the reverse mortgage as a financial cushion. “I wanted to make sure we will be comfortable and can live in this house as long as we want to,” says Ray.

The Smiths’ home appraised for $395,000, and the couple was approved for a maximum payout of $230,000. They were required to pay off their mortgage balance of $80,000, which eliminated their monthly payment of $500 in principal and interest. They took a credit line of $150,000 and immediately withdrew $25,000 to pay off credit cards.

The Smiths can draw from the line when and if they need it, and Ray enthusiastically points out that the line of credit will grow at the same 3.5% rate they will pay on outstanding balances. “Our assets are tied up in investments, and you never know what will happen to them,” says Ray. He says next year he may borrow from the line of credit to avoid incurring tax on income from Social Security and withdrawals from his IRA.

Over the past several years, reverse mortgages have begun to overcome a somewhat tarnished reputation with product changes and additional requirements for financial assessment that have corrected some potentially detrimental features. Retirement income researchers have established reverse mortgages as a viable tool, not just for financially strapped retirees but for well-heeled ones, too. “You may leave more to the kids if you strategically use a reverse mortgage,” says John Salter, a financial planner in Lubbock, Tex., who has studied reverse mortgages.

Contrary to what you may have heard about reverse mortgages, consider these facts: You remain the owner of your home and retain title to it. Because, in effect, you’re receiving loan advances, not income, the money is tax-free, and it won’t affect Social Security or Medicare benefits.

The loan comes due when the last surviving borrower dies, sells the home or leaves it for more than 12 months due to illness. After the borrower leaves the home, lenders must allow an eligible nonborrowing spouse or committed partner to stay. A surviving partner can’t take any more money from the reverse mortgage but must continue maintaining the home and paying taxes and insurance.

You’ll never owe more than the value of your home when you or your heirs sell it to repay the reverse mortgage. If your home sells for more than you owe, you or your heirs keep any leftover equity. If your heirs want to keep the home, they can refinance the reverse mortgage, or they can pay the outstanding debt or 95% of the home’s appraised value, whichever is less.

■ Requirements. To be eligible for a reverse mortgage, borrowers must be at least 62 years old, own the property outright or have paid down a considerable amount of the mortgage, and occupy the home as their primary residence. Lenders will review your income and credit history to ensure you can sustain yourself, keep the home in good condition, and pay for property taxes, hazard insurance and homeowner association fees to avoid defaulting on the loan. If the lender determines you can’t handle those costs, it will set aside funds from your payout in an escrow account and pay those bills for you.

The maximum payout, or principal limit, that you’ll qualify for depends on your age (or that of a younger co-borrower or a nonborrowing spouse, who must meet certain criteria to be eligible), as well as the current interest rate and the appraised value of your home, up to a maximum of $765,600 for a reverse mortgage insured by the Federal Housing Administration in 2020. Several lenders make proprietary jumbo reverse mortgages. The higher your age and home value, and the lower your current mortgage balance and the interest rate that you take, the greater your payout will be.

If you have a mortgage, you must pay it off from the loan or other sources. You can withdraw no more than 60% of your principal limit in the first year, though. Up to an additional 10% of the available funds can be tapped to pay off an existing mortgage debt or make repairs required by the lender.

■ Payout options. A line of credit from a reverse mortgage typically gives you the most proceeds and flexibility. You’re only charged interest on the portion of the line used, and you can make payments at any time.

Unlike a HELOC, the credit line will grow, because the untapped portion of the line compounds at the same rate at which interest and an annual mortgage insurance premium accrue on the balance. With many years and rising interest rates, the line of credit can increase to far more than the original amount.

Borrowers who want guaranteed income can also choose a fixed monthly payment for a set term or for as long as they live in the home.

You’ll get the least payout and flexibility if you take a lump sum. Because you incur interest from day one, it makes no sense to take the money and sit on it.

■ Professional advice. Before shopping for a reverse mortgage, ask a financial adviser how one might fit into your retirement plan. Look for an adviser who has earned the retirement income certified professional designation from the American College of Financial Services.

For a reverse mortgage calculator or to find lenders by state or company, visit the consumer website of the National Reverse Mortgage Lenders Association. Look for a loan officer who is a certified reverse mortgage professional.

You must get financial counseling to ensure that you can meet your obligations as a borrower. To find a counselor certified by the Department of Housing and Urban Development, visit the department’s website and search by map or zip code, or call 800-569-4287. A session costs $125 to $250 over the phone or in person.

■ The cost. At closing, you’ll pay an initial FHA mortgage insurance premium equal to 2% of the home’s appraised value or the maximum limit—$765,600— whichever is less. You’ll also accrue an annual mortgage premium of 0.5% of the outstanding loan balance, which isn’t payable until the loan comes due. The insurance guarantees that you will receive your payout and you’ll never owe more than the value of your home when the loan is repaid.

Lenders can charge an origination fee of up to $6,000, plus fees for third-party services. The fee is equal to the greater of $2,500 or 2% of the home’s value, up to the first $200,000, plus 1% of the amount over $200,000, up to the cap.

You’ll pay a fixed interest rate on a lump sum payout and a variable rate on all other types of payouts. The average fixed rate was 3.8% and the variable rate was 3.3% for loans closed in June (the latest data available), according to HSH.com. Variable rates are based on an underlying index—such as the 1-Year Treasury Bill or the Libor—to which lenders add a margin of 1 to 3 percentage points. In general, the higher the margin you accept, the lower the origination fee.

It pays to shop because lenders vary in the margins, origination fees and closing costs that they charge, says Steve Irwin, president of the National Reverse Mortgage Lenders Association. Some lenders will waive all origination fees, and others will charge up to the $6,000 cap. For example, a lender could have charged the Smiths an origination fee of $5,950, but they paid just $2,000. Get at least three quotes to compare margins, upfront costs and payouts. “Plus, you want to work with a professional who will meet you where you want to meet them—over the phone, the internet or the kitchen table,” says Irwin.

Here’s a twist: You can use a “reverse mortgage for purchase” to buy your next home without ever having another mortgage payment. For more information, go to reversemortgage.org and search “for purchase.”

Is Home Equity Interest Tax Deductible?

The cost of tapping your equity may be reduced on your federal tax return. If you itemize, interest on up to $750,000 of mortgage or home equity debt ($375,000 if you’re married and file separately) is deductible to the extent that the money was used to buy, build or improve your home. (Higher limits of $1 million and $500,000 apply if you acquired the debt before Dec. 16, 2017.) If you refinance, take cash out and pay for a car or vacation, the interest on that amount can’t be deducted.

The interest accrued on a reverse mortgage won’t be deductible until you repay the loan, typically when you leave the house and it’s sold. To qualify for the deduction, the money must have been used to “buy, build or substantially improve” the home.