For many American retirees, a paid-off home represents their largest asset, yet converting that equity into usable retirement income presents a practical challenge.
Several methods are being utilized that allow homeowners to remain in their residences. One approach involves renting out unused portions of a home, such as spare bedrooms, basements, garages, or driveways. This can provide either predictable long-term rental income or higher seasonal returns through short-term rentals, depending on the local market.
Before pursuing rentals, homeowners must consider tax implications, local zoning laws, homeowners association rules, and insurance requirements.
Another growing option is the construction of an accessory dwelling unit, or ADU. These separate structures, sometimes called backyard cottages, can be rented out. Monthly rental income from an ADU can range from $1,500 to $3,000, and many local governments now encourage their construction to address housing shortages.
A home equity line of credit, known as a HELOC, offers another path. It functions similarly to a credit card, allowing homeowners to borrow against their home's value. The Consumer Financial Protection Bureau notes that borrowers can make minimal payments during an initial draw period, often ten years, before entering a repayment phase with higher payments. This provides financial flexibility to cover income gaps.
Reverse mortgages are available to qualifying homeowners aged 62 and older. They allow residents to stay in their homes while receiving tax-free payments, which can be taken as monthly income, a line of credit, or a lump sum. The loan is repaid when the home is sold or the homeowner permanently leaves, often by heirs after the owner's death.
The Consumer Financial Protection Bureau has emphasized that reverse mortgages carry fees and interest, increasing the loan balance monthly, and are frequently targeted by scammers. Financial professionals are often consulted for guidance on this option.
The suitability of these methods depends on an individual's health, location, risk tolerance, and long-term financial goals.