Once retired, your budget may become more limited. Without a steady income to rely upon, many seniors may instead turn to Social Security and retirement savings to help make ends meet. For senior homeowners, however, there may be a smart and cost-effective alternative to access large sums of cash – their home equity. With the average homeowner currently having approximately $200,000 worth of equity to utilize now, home equity loans, home equity lines of credit (HELOCs) and reverse mortgages all have unique value in today’s economic climate.

HELOCs, in particular, have pros and cons, including a lower interest rate than many other credit options. But they also come with inherent risks that may be worth avoiding, particularly for seniors who have a small buffer for financial missteps. To that end, below we will break down what seniors should consider before pursuing a HELOC right now. 

Start by seeing how much home equity you can access here.

Is a HELOC safe for seniors now?

First, seniors should consider the benefits of a HELOC. 

Not only will it allow you access to potentially hundreds of thousands of dollars but that access will come via a lower interest rate than most alternatives. Credit cards have an average interest rate hovering around 21% now while personal loans are around 12%. But HELOCs, because they use your home as collateral, come with rates around 9% right now. And the likelihood of that rate falling further as the year progresses could rise as inflation cools and interest rates are cut, thanks to the variable rate nature that HELOCs come with. 

Other advantages may be attractive for seniors, too. Interest paid on HELOCs is tax-deductible if the funds are used for qualifying home repairs or renovations. And you’ll only need to pay interest on the amount utilized, not the full credit line you’ve been approved for. So, if you secure the HELOC to help pay expenses or debt, but realize you don’t need as much as you applied for, you’ll only pay interest on the amount used (the direct opposite of home equity loans, in which borrowers will get saddled with interest on the full loan amount). 

See what HELOC rate you can secure here now.

But there are substantial risks HELOCs come with that seniors should be aware of, too.

A variable rate is positive in a climate in which rates are dropping or holding steady at a low APR. They’re less advantageous, however, when rates are high and interest rate cuts are minimal. Although a cut to the federal funds rate looks imminent, which will lower the rate on home equity borrowing, only one cut is expected for 2024 at this time of the year. 

So, seniors will need to weigh this risk before getting started. And if inflation somehow starts increasing again, and a rate hike becomes required, the rates on HELOCs will also follow, making them more costly to repay. This would be a problem for seniors who need access to low-interest-rate funding.

Consider a home equity loan instead

For those seniors interested in using their home equity but leery of the variable rate nature of HELOCs, a home equity loan could prove to be a viable alternative. These work similarly to HELOCs but come in a lump sum versus a revolving line of credit. They also have fixed rates, which will only change if you elect to refinance to a lower rate in the future. 

And, right now, they come with slightly lower rates than HELOCs (8.60% on average, as of June 26, versus 9.17% for HELOCs). Home equity loan interest is also tax-deductible for qualifying home projects, for those who need the money to fix up or renovate their current home.

The bottom line

Both HELOCs and home equity loans come with unique advantages and disadvantages. But for seniors looking for a safe and effective way to access financing, a home equity loan is likely the better choice. With a combination of lower rates and a fixed nature, this borrowing option is safer for seniors in need of some extra financing. Ultimately, however, the decision will be up to the individual homeowner and their financial situation so it’s critical to weigh the pros and cons of both before acting. If you don’t, you could risk losing your home if you can’t pay back what you borrowed.

Start researching your HELOC and home equity loan options now.