Benefits of a Paid-Off House in Retirement: Keep or Tap?

If your house is paid off and you’re retired or close to it, you may be wondering whether to keep it that way or put some of that equity to work. The benefits of a paid-off house are real: lower monthly bills, higher discretionary income, and no lender to answer to. But the equity in your home can’t be accessed until you sell the house, sell a portion of its future equity appreciation, or borrow against the house.

For many retirees, a good middle ground is a house that stays paid off with a backup plan in place, rather than borrowing now or ruling it out forever. Read on to learn what a paid-off house does and doesn’t do for you, the ways to tap your equity, and the questions to answer before you decide.

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In this article (Skip to...)

• Benefits of a paid-off house in retirement
• What a paid-off house can’t do for you
• When tapping home equity in retirement makes sense
• Ways to tap a paid-off house in retirement
• How a standby reverse mortgage line of credit works
• When keeping your house paid off is the better choice
• Questions to answer before you tap your home equity
• FAQs

Benefits of a paid-off house in retirement

In retirement, a paid-off house lowers your monthly income requirement, which can reduce your taxable withdrawals and keep more of your Social Security untaxed. It also means there’s no lender involved. That said, you’re still responsible for property taxes, insurance, and general upkeep, so living in the house isn’t free.

A paid-off home is common among older households. About 54% of households headed by someone 65 or older owned their home without a mortgage in 2024, according to Bureau of Labor Statistics Consumer Expenditure Survey data published by the Federal Reserve Bank of St. Louis.

Lower fixed costs with a paid-off house

Without a principal and interest payment, your biggest monthly housing bill is gone. This increases discretionary income and lessens your dependency on Social Security payments, pension streams, and retirement savings. If you’ve just made your last payment, you’ll have a few steps to finish, such as the lien release and escrow changes covered in what happens after you pay off your mortgage.

Smaller taxable withdrawals from retirement accounts

A lower spending need can mean smaller withdrawals from a traditional IRA or 401(k). Traditional IRA distributions are taxed as ordinary income, except for any part that comes from nondeductible contributions, according to IRS Publication 590-B. That matters for two reasons:

• Social Security taxes: For single filers, up to 50% of benefits may be taxable when combined income is $25,000–$34,000; above $34,000, up to 85% may be taxable. For joint filers, the corresponding thresholds are $32,000–$44,000 and above $44,000, according to IRS Publication 915. Special rules apply to married people filing separately. Combined income includes your adjusted gross income, tax-exempt interest, and half of your benefits, according to the Social Security Administration.
• Medicare premiums: higher-income beneficiaries pay an income-related monthly adjustment amount (IRMAA) on top of standard premiums. The Social Security Administration bases it on your modified adjusted gross income from two years before the premium year, so one large withdrawal can increase future Medicare premiums if it raises modified adjusted gross income above an applicable threshold.

No mortgage payment to miss

With no mortgage, there’s no monthly payment to fall behind on and no mortgage lender who can foreclose for missed payments. Unpaid property taxes can still put a home at risk, so make those bills a top priority.

A paid-off house is simpler to pass on

Your heirs inherit the full equity with no loan to settle first. Heirs generally use the home’s fair market value on the date of death as their tax basis, according to the IRS, which can reduce the capital gains tax they’d owe if they sell.

What a paid-off house can't do for you

A paid-off house can’t pay a bill on its own. You might assume your equity is there whenever you need it, but it only turns into cash when you sell the house or borrow against it, and both avenues take time and cost money.

Additionally, a paid-off house is not cost- or risk-free. A few important considerations on these fronts are outlined below.

• Ongoing bills: property taxes, homeowners insurance, and repairs continue, and they tend to rise over time.
• One local market: if home prices in your area drop, the equity you’re counting on drops with them.
• More difficult to borrow in retirement: lenders generally look at your income, credit, and equity before approving a HELOC or home equity loan. Once your paycheck stops, qualifying can take more paperwork, as covered in how seniors on a fixed income qualify for a HELOC.

Say you need $25,000 for a new roof or several months of in-home care (a hypothetical). With little cash on hand, three likely options are as follows:

1. Sell investments, which may create taxable income or lock in losses in a down market.
2. Borrow against the house with a HELOC, home equity loan, or reverse mortgage.
3. Sell the house, which means moving.

The optimal course of action depends on your circumstances, including investment positions, borrowing capacity, and lifestyle flexibility. In this scenario, a thoughtful evaluation is obviously critical. Read on for some insights into when the second option can be sensible.

When tapping home equity in retirement makes sense

Tapping home equity in retirement makes sense when the money solves a specific problem that would otherwise cost you more, such as selling investments at a loss or moving out of a home you want to keep. Below are five situations where borrowing against your home can do just that.

Using home equity for a large one-time expense

A roof, accessibility upgrades, a newer car, or help for a family member can strain a fixed income. Borrowing against your home can spread that cost out instead of draining savings all at once. Interest on a HELOC or home equity loan may be deductible if you itemize deductions and use the money to buy, build, or substantially improve the home securing the loan, subject to applicable mortgage-debt limits and other IRS requirements.

Using home equity to avoid selling investments in a down market

When the stock market falls early in retirement, selling investments to cover bills can lock in losses that your portfolio will never recoup. Some retirees draw on home equity for living costs during a down year so their investments have time to recover. This works only if you have a plan to comfortably manage the debt.

Using home equity to delay Social Security

Waiting to claim Social Security raises your monthly benefit. For anyone born in 1943 or later, benefits grow 8% for each year you delay past full retirement age, and the increase stops at age 70, according to the Social Security Administration. Some retirees use home equity to cover expenses while they wait, a strategy explained as using a reverse mortgage as a bridge to delaying Social Security.

Borrowing to delay Social Security can cost more than the additional benefits you receive and leave less equity for future needs. Compare the borrowing costs and alternatives with a qualified adviser before employing this strategy.

Using home equity to pay for care at home

In-home care and accessibility changes can let you stay in your house longer. A reverse mortgage or HELOC can help pay for both, as shown in how a reverse mortgage can pay for in-home care and renovations.

Using home equity for retirement income when savings are thin

If most of your net worth is in your house and your savings won’t stretch, home equity may be the largest resource you have. A guide to accessing home equity in retirement walks through the options for house-rich, cash-poor homeowners.

Ways to tap a paid-off house in retirement

You can tap a paid-off house by borrowing against it, selling a share of its future value, or selling the house itself. Each option entails something different: assuming a monthly payment, giving up some equity in your home, or entirely disposing of the asset. For details on borrowing against a home you own outright, see getting a loan on a house you own free and clear.

HELOC on a paid-off house

A home equity line of credit (HELOC) lets you borrow repeatedly up to a limit, usually during a draw period of about 10 years, followed by a repayment period. Rates are usually variable, which means payments can change. Moreover, lenders can limit or freeze new borrowing if your home’s value drops significantly or your financial circumstances change, according to the CFPB. The risks for retirees are covered in using a HELOC for retirement income.

Partial home equity loan on a paid-off house

A home equity loan pays a lump sum up front, and you repay it in fixed monthly payments. It suits a single known expense better than ongoing needs.

Cash-out refinance on a paid-off house

On a paid-off home, a cash-out refinance creates a brand-new first mortgage. It often comes with a long repayment term and closing costs, so it makes the most sense when you need a large amount and can comfortably carry the payment.

Reverse mortgage on a paid-off house

A Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program, according to HUD, and it’s only for homeowners 62 and older, according to the CFPB. It requires no monthly principal and interest payment, but interest and fees are added to the loan balance each month, so the debt grows and your equity shrinks. You must keep paying property taxes and insurance, maintain the home, and live there as your principal residence.

Your borrowing limit depends on the age of the youngest borrower or eligible non-borrowing spouse, the interest rate, and your home’s value. For 2026, FHA caps the maximum claim amount used in the calculation at $1,249,125; this is not the amount you can necessarily borrow or receive in cash. The calculation is explained by HUD, and the 2026 cap is set in HUD Mortgagee Letter 2025-22.

Costs include an upfront mortgage insurance premium of 2% of the maximum claim amount and an annual premium of 0.5% of the loan balance, according to HUD’s fiscal year 2025 HECM actuarial review, plus origination fees and other closing costs. Every borrower must also receive counseling from a HUD-approved counselor before getting a HECM, under 24 CFR 206.41.

Home equity investment on a paid-off house

A home equity investment, also called a home equity contract, pays you cash now in exchange for a lump-sum repayment later that’s tied to the change in your home’s future value.

Repayment typically comes due at the end of a 10- to 30-year term or when you sell, and the CFPB calls these contracts expensive compared with other home-secured financing. The same report notes they tend to have looser credit and income requirements than a HELOC. If you cannot afford the settlement when it comes due, you may need to sell your home or face foreclosure.

Selling or downsizing a paid-off house

Selling frees up the most equity, and moving to a smaller or cheaper home can leave cash to invest or spend. You can generally exclude up to $250,000 of gain from income, or $500,000 for married couples filing jointly, if you owned and lived in the home for at least two of the last five years, according to IRS Publication 523.

Comparing the ways to tap a paid-off house

Loans secured by your home can lead to foreclosure if you fail to meet their terms. HECM borrowers must continue paying property charges, maintaining the home, and meeting occupancy requirements.

For a closer look at two of these options, see reverse mortgage vs. HELOC for retirement.

How a standby reverse mortgage line of credit works

A standby reverse mortgage line of credit is a HECM you open as a backup and draw on only if you need it. Opening the line puts a mortgage lien on your home, even if you do not immediately draw cash. Upfront costs still apply, and any financed costs become part of your loan balance. The line is there for a market drop, a big repair, or care costs.

The feature that sets it apart is growth. The line of credit has an adjustable rate, and whatever you don’t use keeps growing, according to the CFPB.

Interest accrues on the outstanding loan balance, including any financed costs, not on unused borrowing capacity. Credit-line growth increases your borrowing capacity; it is not interest earned on savings. You can read more about how the growth works in how a reverse mortgage line of credit works.

A standby line still comes with obligations and costs:

• Upfront costs apply even if you never draw. Mortgage insurance and closing costs are the price of having the backup.
• You must keep your end of the loan. Property taxes, insurance and repairs must stay current, and the home must remain your principal residence, according to the CFPB.
• Long absences can trigger repayment. If you’re away for more than 12 consecutive months in a healthcare facility and no co-borrower lives in the home, the loan must generally be repaid unless an eligible non-borrowing spouse lives there, per the aforementioned CFPB guidance.

A standby line tends to fit homeowners who are 62 or older, plan to stay in the home for years, and want a backup more than a monthly check. The reverse mortgage requirements page covers eligibility in detail.

When keeping your house paid off is the better choice

Keeping your house paid off is often the right call. It’s likely the better choice if one or more of the following conditions are present:

• Your income covers your spending. If Social Security, a pension and planned withdrawals cover your budget with room to spare, there’s little reason to borrow.
• You plan to move within a few years. Upfront loan costs, especially on a reverse mortgage, take time to pay off. The FTC notes a reverse mortgage can be an expensive way to borrow.
• Leaving the house free and clear is an estate plan priority. Any borrowing reduces what your heirs receive.
• A payment would strain your budget. A HELOC, home equity loan or cash-out refinance adds a monthly bill to a fixed income.
• You already have a cash reserve. If savings can cover a surprise, you may not need a backup line at all.

What experts are saying:

Thomas Brock, CFA, CPA

I’ve found that people can become so focused on eliminating debt that they overlook the opportunity cost of tying up too much of their wealth in their homes. In retirement, the goal shouldn’t be to have the least debt possible. Rather, the goal should be to have enough financial flexibility to cover spending needs and address sudden fiscal challenges without jeopardizing one’s long-term security. Borrowing against a paid-off home isn’t a bad move if it helps bolster this endeavor.

Questions to answer before you tap your home equity

Before you tap your home equity, ask yourself the following questions:

1. How much money do you need, and is it a one-time cost or ongoing?
2. Could you cover it from savings without a large tax bill or selling investments at a loss?
3. Could you comfortably make a monthly payment on your current income?
4. How long do you plan to stay in your home?
5. Does anyone else live there, such as a spouse who wouldn’t be on the loan?
6. Do you receive or expect to need SSI or Medicaid? Reverse mortgage payments are loan proceeds and aren’t counted as income for SSI, according to the Social Security Administration. Loan proceeds retained into the following month count as resources for SSI and may affect eligibility. Medicaid treatment depends on the applicable program and state rules; consult a benefits counselor before borrowing.
7. Have you talked with a HUD-approved housing counselor or a fee-only financial planner?

You can find a HUD-approved counselor through HUD’s counselor search or by calling (800) 569-4287. If a reverse mortgage is on your list, is a reverse mortgage a good idea? covers the trade-offs in more depth.

FAQs

Is it better to have your house paid off in retirement?

For many retirees, yes, because it lowers the income you need and removes a monthly payment. Whether it’s better for you depends on your income, savings and plans. A backup credit line may provide access to cash, but it adds a lien, costs and obligations to a previously mortgage-free home.

What is a good age to have your house paid off?

There’s no single right age. Paying off the mortgage before you stop working means your housing costs drop before your paychecks disappear. Borrowing against your home is usually simpler while you still have a paycheck; so, that’s also a good time to decide whether you want a backup line of credit.

Can I get a HELOC on my paid-off house after I retire?

It’s quite possible, but lending requirements vary by lender. Lenders generally review your retirement income, credit score, and home equity. Lenders cannot disregard otherwise qualifying income simply because it comes from a pension, retirement benefit or public assistance; they may evaluate the sustainability of these income sources.

Does a reverse mortgage mean the bank owns my house?

No. A reverse mortgage is a loan secured by your home; you retain title. To keep a HECM in good standing, you must meet principal-residence requirements, pay required property charges such as taxes and homeowners insurance, maintain the property and comply with the other loan terms. The loan can become due if these requirements are not met.

Will tapping my home equity affect Social Security or Medicare?

Reverse mortgage advances are loan proceeds, not taxable income, and generally do not directly affect Social Security retirement benefits or Medicare eligibility, according to the FTC. Selling your home or investing the proceeds can have different tax and Medicare-premium consequences. SSI and Medicaid have separate income and resource rules.