Retirement Retired Life

7 Home Equity Moves That Can Backfire in Retirement

Tread carefully with home equity as a source of income in later years.

By William DeLong

Edited by Sara Albertelli

Updated June 24, 2025

Does your nest egg need a boost to support a stress-free retirement? Or perhaps you could use some extra funds to cover medical bills that are piling up.

If so, tapping into your home equity, the portion of your home's value that you truly own, can seem like a practical solution.

While leveraging your home equity might sound good in theory, using it without understanding the consequences can cost you big time. Before you get a home equity loan or sell your house, here are seven things to think about.

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Underestimating what can happen with a property assessment

Whether you live in a state that assesses your property annually or less frequently, you want to be mindful of what can happen. An assessor can make assumptions that you've made significant improvements to your home, which could increase its value and, in turn, your tax bill.

You certainly don't want the value of your home to decrease, though, especially if you plan to sell it later. Consider disputing your assessment if you think there's anything out of sorts that could hit you hard financially.

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Unexpected negative equity if your home value drops

Your home equity is the value of your home that you own. If you bought your home for $450,000 and you owe $400,000, you own $50,000 or 11% equity.

Ideally, your home value continues to increase, and thus your equity. However, if suddenly your home is worth less than you paid for, you'll find yourself with negative equity.

Negative equity can limit your financial options, including your ability to refinance a mortgage for a lower interest rate.

Volatile HELOC interest rates

A home equity line of credit (HELOC) operates like a credit card because you can borrow money against it, repay it, and then borrow money again. Like a line of credit, your available credit is replenished as you repay it.

The problem? HELOCs typically have a variable interest rate, which means your payment rate is often unpredictable. This can cause major problems if you suddenly find it difficult to make repayments.

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Investing your home equity in the stock market

Mutual funds, stocks, bonds, and other securities offer ways to build your nest egg, and you might feel tempted to tap into your home equity to strengthen your portfolio.

But all investments come with risks. Beyond taking on more debt and potentially losing a lot of money, you also risk losing your home. This is a worst-case scenario, but it is still a very real possibility.

Misunderstanding a cash-out refinance loan

Another loan option that involves your home equity is a cash-out refinance loan. With this loan, you replace your existing mortgage with a new, larger loan and receive the difference in cash.

In most instances, this means a larger, monthly mortgage payment, which isn't the best option for someone on a fixed income.

Making major renovations that don't have a significant return on investment (ROI)

The cost of home renovations can vary significantly depending on which room you're renovating and what you're doing. The goal of any home renovation is to add additional value to your home, meaning it should add to your home equity.

However, to make the most of the renovation, really look at how much it will cost and what the anticipated ROI would be. If you're unsure, it might be worth consulting a real estate agent to get their opinion on what renovations truly impact a home's value.

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Assuming a reverse mortgage eliminates all monthly home expenses

Available to homeowners 62 and older, a reverse mortgage allows borrowers to take out money against their home equity. This eliminates monthly mortgage payments and gives the borrower cash to use on other expenses, like unexpected bills or to supplement their day-to-day expenses. The lender recoups the costs from the sale of the home or after the borrower passes away.

The thing to keep in mind, though, is that although this eliminates your monthly mortgage payment, it doesn't eliminate all monthly expenses related to your home. This means you'll still have to pay utilities, taxes, insurance, etc.

Bottom line

According to the National Reverse Mortgage Lenders Association (NRMLA), seniors in the United States have more than $13 trillion in home equity, and it can be a valuable asset in retirement if you know how to use it wisely. But, it is essential to thoroughly consider all the risks (and avoid money mistakes) before making any decisions.

Take some time to consider all your options, as well as your financial goals.

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