Use Home Equity to Pay Debt Before Retirement: Smart Moves

How pros think about home equity (and why they sleep better)

Here’s what seasoned finance folks do differently with home equity: they treat it like a tool, not an ATM. The point isn’t “how do I slash my monthly payment right now,” it’s “how do I reduce lifetime risk, keep cash flow resilient, and avoid tax booby traps”, especially in the last 5-10 years before retirement, when one sloppy refinance can haunt your Social Security and RMD timing. Sounds a bit intense? It is. But it’s also how you sleep better.

Quick reality check on rates and the backdrop: mortgage rates this year are still higher than the 2021 lows, though they’re off the 2023 peaks. HELOCs remain mostly variable and typically ride the prime rate (in 2024 prime sat at 8.50% for much of the year, so many HELOCs priced at prime ± a margin). Translation: rate risk is not imaginary. Meanwhile, a large chunk of Americans have meaningful home equity, about 39% of homeowners owned free and clear in 2022 per Census ACS, so the temptation to tap the house to fix short-term problems is very real.

Small caveat on data: our quick scan for research specific to “use-home-equity-to-pay-debt-before-retirement” didn’t surface clean, apples-to-apples studies. So I’ll note the general market stats above with their years, and keep the rest grounded in how pros actually underwrite these decisions.

So what do the pros do? Three buckets: risk, cash flow, taxes. And they write things down. No vibes-based policy.

• Match debt type to asset life. If the expense lasts 3 years (say, a medical bill plan or a used car that won’t be around long), they won’t hide it in a 20-30 year mortgage unless there’s a written, accelerated payoff. Example policy: “HELOC draw for $24k, auto-pay at $750/mo, target payoff in 36 months, freeze further draws.” Why? Because paying for a 2019 SUV until 2055 is how people end up resentful at 72.
• Benchmark cash-flow relief against total interest paid. Is dropping the payment by $450/mo worth adding $28k of extra interest over the life of the loan? Pros do that math first. They’ll compare: (a) keep current debts and kill them in, say, 24 months vs. (b) roll into home-secured debt and prepay on a fixed schedule. If option (b) doesn’t win on both stress-tested cash flow and total interest, it’s a no.
• Stress-test before signing anything. What if one paycheck disappears for six months? What if the HELOC adjusts up 2%? What if home prices dip 10% while you still carry the balance? If those scenarios force a budget crisis, that’s your answer. In the run-up to retirement, they assume the shock happens in the worst year, because sometimes it does.
• Use written payoff policies. A simple one I like: “No rolling short-term debt beyond a 36-month amortization unless the asset’s life exceeds the loan term.” Add auto-pay, calendar reminders, and a monthly prepayment rule (e.g., 50% of any bonus goes to principal). Not fun. Effective.

Taxes? Two rules that save people: (1) post-2017, mortgage/HELOC interest is generally deductible only if the proceeds buy, build, or substantially improve the home, and (2) the mortgage interest deduction cap for new loans is $750k of acquisition debt (Tax Cuts and Jobs Act, 2017). Using equity to pay off credit cards usually won’t be deductible. That matters when you’re managing AGI around Medicare IRMAA brackets and Social Security taxation in those first retirement years. I know, it’s getting a little nerdy, but that’s the point.

What will you get from this section of the guide? A clear, step-by-step framework to evaluate whether tapping home equity before retirement actually reduces risk: how to map debt to asset life, set a payoff policy, run a total-interest comparison, and build a simple stress test. Quick personal note: I’ve watched more than a few clients sleep better the day they put the payoff plan in writing, even if they didn’t borrow at all. The plan, not the product, is the feature.

Where it can make sense in 2025 (and where it absolutely doesn’t)

Here’s how I think about it, in real life, not whiteboard finance. Rates are still elevated this year, so the bar for swapping debt is high. Credit cards are punishing, mortgages are sticky, and HELOCs float with prime. You want mismatches to shrink, not grow.

Quick rate reality check, 2025: Federal Reserve data show average credit card APRs stayed above 21% across 2024-2025 (the Fed’s G.19 series has been hovering in the low-20s). The U.S. prime rate is 8.50% in 2025, which means many HELOCs are pricing around prime ± a margin, call it ~8.5% to 10.0% APR, depending on credit and LTV. And 30‑year fixed mortgages, per Freddie Mac’s 2025 weekly survey data, have mostly sat in the mid-to-high 6% range. That spread drives the logic.

Good fit (I’ll be blunt):

• High-rate unsecured debt (cards at 21-25%, some personal loans in the teens) paired with a 12-36 month written payoff plan and stable W‑2/pension/annuity income. If a HELOC at ~9% takes you from compounding at 22% to amortizing at 9% over 24 months, your total interest drops fast, and your runway to retirement looks cleaner.
• Matched amortization: Set automatic payments that fully retire the borrowed equity before or early in retirement. No interest-only drifting. Yes, really.
• Liquidity cushion intact: keep 6-12 months of essential expenses in cash/short-term Treasuries. Don’t use the HELOC as your emergency fund; that’s backwards.

Maybe (case-by-case, and I’d spreadsheet this):

• Consolidating personal loans if you keep your low first-mortgage rate intact by using a HELOC, not a cash-out refi. If your first is 3.0% from 2020-2021, protect it. A second-lien HELOC at ~9% to wipe out a 13% personal loan can work if you lock a 24-30 month payoff and the closing costs are near-zero.
• Bridge to a known liquidity event (vesting RSUs, a business sale, RMDs starting next year) where timing is tight but proceeds are highly likely. Just cap the draw and put the date on your calendar; ambiguity is where people get burned.

Usually no (rate-chasing that backfires):

• Replacing a sub‑3% 2020-2021 first mortgage with a 2025 cash-out refi in the 6-7% range. You’re giving up ultra‑cheap, fixed 30‑year money to pay off short‑life debt. That’s negative optionality, and the interest cost over time balloons, even if the payment “feels” smoother.
• Ignoring taxes: as noted earlier, post‑2017 rules generally don’t allow a deduction when equity is used to pay consumer debt. If you were banking on a deduction to offset IRMAA brackets, that’s probably not there.

Red flag (hard stop, do behavior first):

• Using equity to paper over overspending. If monthly spend keeps outrunning income, swapping to a HELOC just resets the clock. Fix the cash flow habits; then, if needed, finance the residue. I’ve sat with clients who did the reverse, six months later the cards were back up, and now they had two problems.

Rate mechanics you can’t ignore in 2025:

• HELOC margins and caps: Many contracts float at prime ± a margin with lifetime caps often at 18%. If prime stays at 8.50% or moves, your payment moves. In an elevated-rate year like 2025, that variable-rate risk is real; model +200 bps on prime and see if the plan still stands.
• Payment type: Interest-only draw periods are tempting; prefer fully amortizing payments from day one. It forces discipline, and you’ll sleep better (yea, I’m repeating myself).

Net-net: in 2025, high-rate unsecured debt with a tight 12-36 month payoff and stable income is where home equity can earn its keep. Cash-out refis that sacrifice a 2020-2021 sub‑3% first? Usually a no. The plan is the feature; the product is just plumbing.

Pick your tool: HELOC, cash‑out refi, or reverse mortgage line (62+)

Different tools, different strings attached. Pre‑retirees usually care about three things, rate level, flexibility, and not putting the roof at unnecessary risk. Here’s how the main options stack up in late 2025, when prime is still 8.50% and 30‑year cash‑out quotes are hovering in the high‑6s to low‑7s for strong files.

• HELOC (home equity line of credit): Variable rate, often priced at prime ± a margin. In 2025 that means something like 8.50% + 0.75% to 1.50% for well‑qualified borrowers. Payments are interest‑only during the draw for many contracts, which keeps cash flow light, but the balance can linger if you’re not disciplined. Many legacy HELOCs carry lifetime rate caps around 18%, so model the bad‑case. The big win: you keep your low first‑mortgage rate intact (all those 2020-2021 2-3% loans should be protected). I like HELOCs for flexible, smaller bites, paying off a $20-$60k card/HELOC blend, staged home repairs, or a cash‑flow bridge before RMDs kick in. Tip from battlescars: set an autopay to amortize it over 24-36 months even if interest‑only is allowed.
• Home equity loan (second mortgage, fixed rate): Fixed rate, fixed payment, installment style. Useful when you know the balance day one and want it gone on a schedule. Rates are typically a bit higher than prime for top‑tier borrowers but remove the variable‑rate headache. If you’ve got a defined $50k project or a final debt clean‑up, this is the “discipline baked in” option. You still preserve the cheap first mortgage.
• Cash‑out refinance: One new loan that pays off the existing first and hands you cash. In a year like 2025, it’s usually a tough sell if you’re sitting on a sub‑3% first. It only makes sense if the blended rate and closing costs beat the combo of your current mortgage + a second lien. Quick gut check: if your current first is 2.875% and cash‑out quotes are ~7% today, the math has to be truly exceptional elsewhere to justify nuking the old rate. Nine times out of ten for pre‑retirees, this is a no.
• Reverse mortgage line of credit (HECM LOC, age 62+): No required payment; interest and FHA insurance accrue. Upfront FHA insurance is 2% of the max claim amount, with an ongoing annual MIP of 0.5% on the balance (those are the standard HECM charges, and they still apply in 2025). The LOC has a unique feature: the available line grows over time at the note rate + MIP, which can be helpful as a longevity hedge. Use it sparingly, great as a last‑resort payoff of stubborn high‑rate debt or a standby cash‑flow buffer to protect portfolios in a down year. But remember: interest accrues, equity shrinks.

Lender guardrails you can’t ignore: Most banks get tight above ~80% LTV combined, and standard DTI caps cluster around 43% for qualified mortgages. For HELOCs/seconds, many lenders want CLTV at or under 80-85% and will haircut appraisals if comps look soft. Reverse mortgages use age‑based principal limit factors; older borrowers can access a larger percentage of equity, but effective borrowing power still improves with lower rates and higher home values.

How I’d frame the trade‑offs in 2025:

• If you’ve got a low‑rate first and short‑dated debt to kill: start with a HELOC or a fixed home equity loan. Keep the first untouched.
• If you need certainty and you know the dollar amount: the fixed home equity loan wins. It forces payoff behavior.
• If you were thinking cash‑out: only if the all‑in rate/cost beats the keep‑first‑plus‑second combo. In 2025, that’s rare.
• If you’re 62+ and cash flow is tight: a HECM LOC can be a safety valve, no payment required, but treat it like emergency gear, not everyday spending money.

One personal note: I’ve watched clients who set a HELOC to amortize over 30-36 months sleep better, payments go up, sure, but balances actually move. When we left it interest‑only, six months later life happened and, well, the balance hadn’t budged. This is getting a bit technical, I know, but that’s the real world trade‑off between flexibility and discipline.

Taxes, fees, and the fine print you’ll thank yourself for reading

Quick tax reality check. Under the Tax Cuts and Jobs Act of 2017 (TCJA), interest on home equity debt is generally deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan. That means: use the HELOC to remodel your kitchen, maybe deductible; use it to pay off a 19% credit card, usually not deductible. I know, it feels like it should help when you’re consolidating, most people assume it does. But the statute and the IRS guidance since 2018 are pretty clear on “acquisition indebtedness.” One more cap to remember: for mortgages taken out after December 15, 2017, the mortgage interest deduction is limited to interest on up to $750,000 of qualified residence loans (married filing separately is $375,000). And state and local tax (SALT) deductions are still capped at $10,000 per return under TCJA rules through tax year 2025. Translation, don’t build your case around a big tax write-off unless you know you’re itemizing and your use of funds qualifies.

On costs, expect friction. Cash-out refinances usually come with full closing costs, think appraisal, title, recording, lender fees. A rough street range I’m seeing this year: about 2%-5% of the loan amount, higher for smaller balances. Fixed home equity loans also carry closing costs, though some lenders will “credit” them with a rate bump. HELOCs can advertise low or no closing costs, but they often have annual fees (say $50-$100), inactivity fees, and sometimes a small early-closure fee if you shut the line within 24-36 months. It’s all in the fee schedule, annoying to read, but this is where dollars leak out.

HELOC rates move. Most are variable-rate tied to an index, usually the U.S. Prime Rate, plus a margin. I almost wrote “rate cap structure” and then realized that’s jargon; what matters is two ceilings: a periodic cap (how much it can jump at once) and a lifetime cap (how high it can ever go). Model the uncomfortable version, not the brochure version. Example: on a $60,000 HELOC with a 20-year repayment, every 1 percentage point rate increase pushes the payment roughly $30-$35 per month, give or take, depending on your amortization. If your margin is 1.50% and the lifetime cap is +5 percentage points above your start rate, ask yourself, could you live with that top-end payment? If yes, fine. If no, resize the line.

Prepayment penalties? Rare on first-lien mortgages now, but don’t assume. Some nonbank products and portfolio lenders include them. More common: early-closure or recoupment fees on HELOCs and home equity loans if you close the account or refinance away within 24-36 months. It’s the “we paid your closing costs” clawback. If you think you might refinance again soon, that fee matters more than the last eighth on the rate.

If you itemize, triple-check the debt consolidation angle. Interest on money used to pay off unrelated personal debt, credit cards, auto loans, generally doesn’t qualify as deductible under the TCJA framework. A lot of folks still remember pre-2018 rules. Different world. I’m going to repeat myself: confirm your specific use-of-funds with a CPA for the current tax year before you assume any deduction. I’ve had two clients this year who thought they’d get a big write-off from consolidating cards into a HELOC, neither did, and both were annoyed (fairly).

Closing thought on structure: promotional periods and draw periods end. A HELOC that’s interest-only for 10 years flips to amortizing, and the payment can jump, sometimes a lot, when the repayment period starts. Ask your lender to show the highest payment under your lifetime cap. It’s not pessimism; it’s adult math. And yes, I once underestimated this on my own line years ago and had to rejigger my budget for a quarter. Not fun, but it was a good reminder to model the ugly case.

My take: in 2025, with rates still choppy and fees not exactly charitable, the “keep your cheap first mortgage and add a right-sized second” approach usually wins, but only if the second’s fine print doesn’t eat the savings. Read the fee grid. Confirm the tax treatment. Then decide.

Make the call with a simple framework: cash flow, cost, and risk

If you’re weighing a HELOC or cash-out to clean up debt before retirement, run these four tests in order. It’s not fancy, just the math you’d do on a legal pad. I’ll keep it practical and numbers-first, and yeah, I might be slightly oversimplifying in spots, but the guardrails are solid.

1. Cash-flow test, Can your new required payment fit inside a retirement-ready budget? As a quick sanity check, keep housing + debt at roughly 28-36% of gross income. Example: if household gross is $9,000/month, 36% is $3,240. If today you pay $2,200 for mortgage/taxes/insurance and $300 on other debt, adding a $1,100 HELOC payment takes you to $3,600, over the cap. That fails the test. If you’re at or under the band, proceed.
2. Total cost test, Compare lifetime interest and fees for the equity solution against an aggressive DIY payoff of current debts in 12-36 months.
   • Illustration (not a rate quote): $35,000 of card debt at 22% APR, paid off in 24 months, is about $1,817/month and roughly $8,600 of interest over two years (using a standard amortization formula).
   • Same $35,000 via a HELOC amortized in 36 months at 8.5% would be about $1,107/month and roughly $4,850 of interest; add, say, $800 of fees and you’re near $5,650 total cost. Savings vs. the card plan ≈ $3,000, plus a lower monthly hit. If the fee stack is heavier, or you stretch the term, the gap narrows fast.
3. Payoff policy, Put it in writing. Set an amortization you’ll actually follow: “Auto-pay principal to retire the HELOC in 24-36 months.” No interest-only drift. I’ve seen too many “I’ll prepay later” plans morph into 7-year IO zombies. Tip: set a fixed extra principal draft on payday; treat it like a bill you can’t skip.
4. Rate risk test (for HELOCs), Can you afford it if rates rise 2-3 percentage points from today? With a 36-month amortization, payment sensitivity is modest but real. On $35,000:
   • At 8.5% ≈ $1,107/month
   • At 11.0% ≈ $1,149/month
   • At 13.5% ≈ $1,186/month

   Interest-only is a different animal: the required payment jumps from about $248/month at 8.5% to ~$322 at 11% and ~$394 at 13.5%. If your plan relies on IO, make sure your budget can eat that jump without stress.

Equity buffer, After the transaction, keep at least 15-20% equity. That’s your cushion if home prices wobble before you retire. Example: home value $600,000; 80% LTV is $480,000. If you owe $330,000 on the first mortgage, staying at 80% caps your total debt at $480,000, so roughly $150,000 of “room.” Near retirement, I’d be stingier, aim for 20%+ equity left.

Tax footnote, The TCJA rules that kicked in for 2018 still apply: interest on home equity borrowing is deductible only if the proceeds are used to buy, build, or substantially improve the home securing the loan (IRS Publication 936, 2018 onward). Using a HELOC to pay credit cards generally isn’t deductible. That’s tripped up a lot of folks this year again.

Quick template to decide: (1) Pass the 28-36% cash-flow cap? (2) Total cost with fees beats a 12-36 month DIY payoff? (3) Written amortization to kill the balance in 24-36 months? (4) You survive a +2-3% rate bump? (5) You keep 15-20% equity after? If you can’t check all five, the status quo or a smaller second is likely safer, especially with 2025’s still-uneven rate environment.

One last human note: ask your lender to show the highest possible payment under the lifetime cap and the amortizing phase. I once lowballed this on my own line and had to tighten the belt for a quarter. Not fatal, just annoying, and avoidable.

Avoid the classic traps: don’t turn a spending problem into foreclosure risk

I’ve watched the same mistakes on repeat since the dot‑com bubble, and 2025 hasn’t broken the pattern. Tough love time.

• Rolling revolving debt into a 20-30 year schedule without fixing behavior. If the real issue is overspending, a HELOC doesn’t cure it. It just hides it in your house. The Fed’s own data shows the average credit card APR was roughly 21-22% in 2024 (Federal Reserve G.19 series on assessed interest). Yes, that stings. But turning a 22% problem into a 30‑year 8% problem can cost more total dollars if you keep swiping. My take: lock a written amortization for any debt consolidation to 24-36 months and cut card limits during payoff. And if that sounds brutal, that’s kind of the point.
• Nuking a 2020-2021 ultra‑low first mortgage with a cash‑out refi. Don’t. Guard those unicorn rates. Redfin reported in 2023 that about 62% of mortgage holders had sub‑4% rates and ~92% were under 6% (2023 data). Giving that up to consolidate at a higher blended rate is usually a permanent pay‑more tax. Consider a modest HELOC or closed‑end second instead, sized to a payoff plan, not to what the bank will approve. Yes, this part matters a lot.
• Borrowing to max LTV late in your career. If you’re 55+ and thinking about retirement timing, flexibility beats maximum use. Roofs, HVAC, and accessibility retrofits don’t care about your retirement date. Keep a buffer: I like staying at least 20% equity after any new lien and reserving home equity capacity for genuine emergencies, not convenience spending. And I say this as someone who’s been too aggressive once, spent a summer patching a cash cushion I shouldn’t have touched.
• Skipping insurance and emergency‑fund checkups. Once the house is on the line, cash‑flow interruptions get dangerous fast. A basic rule I use with clients: 6 months of expenses in cash equivalents if you have a HELOC or second, and review disability coverage before you sign. It’s not glamorous, but it’s the thing that keeps the lights on if a back tweak turns into 12 weeks off.
• Not rate‑shopping on HELOCs and seconds. Small pricing differences compound. Freddie Mac’s 2018 study showed borrowers who got 5+ quotes saved about 0.17 percentage point on average, roughly $3,000 over the life of a typical mortgage. Different product, same lesson: HELOC margins over prime can vary 0.25-1.00%. On an $80,000 average balance, a 0.50% margin gap is ~$400 a year, and more if you carry it for years. Get at least 3 quotes, ask for the lifetime cap, the margin, and all draw/annual fees in writing.

And yes, I know this is getting a bit detailed. But the pattern is simple: fix the budget first, protect low‑rate first mortgages, leave yourself equity room, insure your cash flow, and shop the rate like it’s a car purchase. Do those five and you avoid the plot twist where the house becomes collateral damage. I’ve seen that movie; you don’t want the ending.

Your pre‑retirement equity checkup: a 60‑minute challenge

Alright, rubber meets road. This part is about printing the numbers and making a call this week, not someday when the stars align. Rates are still chunky: as of October 2025, most HELOCs are quoted off Prime with margins that land effective rates roughly in the 8-9% range, and 30‑year refis are hovering around the high‑6s depending on credit and points. That context matters because you don’t uproot a cheap first mortgage lightly.

Step 1: List every debt, no exceptions

• Make a table: lender, balance, interest rate (APR), required monthly payment, and whether the rate is fixed or variable.
• Sort by interest rate, then by balance. You want your target order staring you in the face.
• Map a payoff path: 12, 24, and 36 months. Three lines. See what’s actually feasible against your net cash flow. If you can’t show it on paper, you won’t do it in life.

Step 2: Pull your mortgage details

• Grab your first mortgage note or statement: current balance, rate, remaining term, and escrow/escrowless.
• If your first is sub‑4% from the 2020-2021 wave, treat it like fine china. Don’t touch a great first mortgage lightly; the replacement cost today is high‑6s, give or take.

Step 3: Price the second‑lien options before you touch equity

• Get two HELOC quotes and one fixed home equity loan quote. In writing. You want margin over Prime, lifetime cap, draw period, annual fees, and closing costs spelled out.
• Model the payment at the quoted rate and at +2%. HELOCs float. If you can only breathe at 8.25% but not at 10.25%, that’s a signal.

Quick reality check on shopping

Freddie Mac’s 2018 study showed borrowers who got 5+ quotes shaved ~0.17 percentage point on average, about $3,000 over a typical mortgage life. Different product, same lesson: price shopping on seconds and HELOCs moves real dollars.

Step 4: Run a break‑even, not a vibe check

• Total up: all interest and fees on the HELOC/equity loan over your planned payoff window (assume current rate and +2%). Include any appraisal, annual fees, and the “gotcha” early termination fee.
• Compare it to a pure cash‑flow attack on your debts with no equity tap. Use the same 12‑, 24‑, and 36‑month schedules you built in Step 1.
• If tapping equity doesn’t reduce total interest + fees and pull in your debt‑free date meaningfully, then it’s just financial furniture moving. Pass.

Step 5: Set guardrails before you sign

• Write a one‑page payoff policy: which cards/loans get zeroed day one, and a rule against re‑loading debt (yes, write it, future‑you forgets).
• Spending caps by category for 90 days. Groceries, dining, travel, pick numbers you can defend to your most honest friend.
• Equity buffer target: leave at least 20% equity after the draw, and honestly, I prefer 25-30% in a choppy market. That protects flexibility if home values wobble.
• Emergency fund floor: three months bare‑bones expenses in cash after closing. If a HELOC wipes your cash, the plan is too tight.

Quick aside, human to human: if any of this feels like you’re forcing it, that’s useful information. Numbers shouldn’t require wishful thinking. If it only works with a bonus, a tax refund, and markets going straight up… it doesn’t work. I’ve made that mistake; it’s not a fun post‑mortem.

Step 6: Decide this week, no punting

1. Schedule one hour on your calendar within the next 7 days. Phone on Do Not Disturb. Coffee optional, calculator not.
2. Run the three cases: proceed (equity tap makes mathematical and behavioral sense), pause (numbers are close; you want more quotes), or fix cash flow first (cut spend, raise income, sell something small, then revisit).
3. Document the decision and the next two actions. Even two small steps, submitting quotes, canceling a card fee, build momentum.

Snapshot benchmarks to sanity‑check your model

• HELOCs right now are commonly Prime ± margin; many land near the low‑8%s APR. Model +2% stress.
• If your first mortgage is 3% and you’re considering a cash‑out refi to ~6.75-7.00%, that’s a very high hurdle. A second lien usually preserves the cheap first, prefer it unless fees or size push you otherwise.
• Break‑even should show a faster payoff and lower total interest within 24-36 months. If not, cash‑flow payoff is probably the winner.

You don’t need perfect. You need accurate enough to choose. List debts, price the money, stress‑test +2%, and set guardrails. Then decide: proceed, pause, or fix cash flow first. Same idea said twice because it matters, decide this week.

Frequently Asked Questions

Q: How do I use a HELOC to pay off high-interest cards without blowing up my retirement plan?

A: Treat the HELOC like a surgical tool, not a lifestyle upgrade. From the article: write a short policy before you draw. Example: “$24k draw, auto-pay $750/mo, 36‑month payoff, freeze further draws.” Keep the term short because your credit-card purchases don’t have a 20-30 year life. Run the math: if the HELOC rate is variable (most track prime), stress-test at +2% and +4% rate scenarios to make sure the payment still fits. Automate payments, and set calendar check‑ins every quarter. If you can’t commit to a 24-36 month payoff, don’t use housing collateral for it, cut expenses and attack the cards directly instead.

Q: What’s the difference between a cash‑out refi and a HELOC for pre‑retirees?

A: Cash‑out refi: replaces your whole mortgage, usually fixed rate, larger closing costs, resets the amortization clock (risk: stretching short‑term debt over 30 years). Payment is amortizing from day one. HELOC: second lien, usually variable rate, lower upfront costs, interest‑only during draw, faster to set up, but you carry rate risk. If you’ve got a sub‑4% first mortgage, a HELOC often preserves that cheap debt. If your first is expensive and you need a durable, fixed payment, a refi may fit, but don’t roll 3‑year expenses into 30 years without an aggressive prepayment plan.

Q: Is it better to keep my low 3% first mortgage and open a small HELOC, or refi the whole thing to pay debts?

A: Usually, keep the cheap 3% first and use a small, disciplined HELOC, if you can pay it off fast. The article’s framework applies: match debt term to asset life, and benchmark any cash‑flow relief against total interest paid. Write the rules down and follow them. If you refi the whole balance at a higher rate just to sweep $20k of cards, you may lower stress today but pay far more interest over time. A compromise I see work: keep the 3% loan, open a HELOC for the card balance, auto‑pay to kill it in 24-36 months, and lock the HELOC if your bank lets you once the draw is done.

Q: Should I worry about taxes when I use home equity to pay off debt?

A: Yep. Two big ones: (1) Interest deductibility, under current rules (TCJA, in effect through 2025), interest on home‑equity debt is only deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. Paying off credit cards, medical bills, or a car? Not deductible. Many pre‑retirees take the standard deduction anyway, so the tax benefit may be zero. (2) Cash is not income, pulling equity isn’t taxable, but it doesn’t mean free money; you’re swapping unsecured debt for secured debt against your house. Also: points on a refi may be amortized, state rules vary, and big interest payments can affect ACA subsidy calculations via cash‑flow decisions (not directly taxable, but related planning). If you’re within 1-3 years of Social Security or RMDs, coordinate draws with your tax planner so you don’t accidentally crowd out strategic Roth conversions later this year or next.

@article{use-home-equity-to-pay-debt-before-retirement-smart-moves,
    title   = {Use Home Equity to Pay Debt Before Retirement: Smart Moves},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/use-home-equity-before-retirement/}
}