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For many retirees, their home is more than a place to live—it’s their most valuable asset, built through decades of hard work and financial discipline.

When liquidity is needed in retirement—whether to help children with a down payment, fund home improvements, or simply create a financial cushion—tapping into that equity becomes a practical necessity.

Let’s consider a real-world example: A couple, ages 75 and 72, live in a $1.5 million home with no mortgage. They also have a $1 million IRA but no other liquid assets. They want to gift $500,000 to their children to help with a home purchase and also plan to make some upgrades to their own home. Rather than withdrawing from their IRA and triggering a significant tax bill, they’re exploring ways to access the equity in their home.Two common options are a reverse mortgage and a cash-out refinance. While both can provide access to home equity, they differ significantly in structure, cost, and long-term impact. Their goal isn’t just liquidity—it’s helping their children now while preserving their financial legacy.

The Reverse Mortgage: A Double-Edged Sword

A reverse mortgage allows homeowners aged 62 and older to convert part of their home equity into cash without monthly mortgage payments. The loan is repaid when the homeowner sells the house, moves out, or passes away.

Pros:

·       No monthly mortgage payments – helpful for retirees on fixed income

·       Access equity without selling – stay in your home while unlocking value

·       Non-recourse loan – you’ll never owe more than the home is worth

·       Flexible payout options – choose lump sum, monthly income, or a mix

Cons:

·       High fees and interest rates – upfront cost and compounding interest can erode equity

·       Reduced inheritance – less equity may remain for heirs

·       Foreclosure risk - if taxes, insurance, or upkeep are neglected

·       Complex terms - potential for misunderstood or misrepresented terms

·       Loss of home – if you move into long-term care, the home may need to be sold

In our case study, a reverse mortgage might seem appealing due to the lack of monthly payments. However, the couple would likely face high upfront costs and ongoing interest accrual that eats into their equity. If they pass away or move into assisted living, their children may inherit far less than expected—or nothing at all.

The Cash-Out Refinance: A More Strategic Option

A cash-out refinance replaces the existing mortgage (in this case, none) with a new, larger mortgage, allowing the homeowner to take the difference in cash. With today’s relatively low interest rates, historically speaking, for well-qualified borrowers, this can be a cost-effective way to access liquidity.

Pros:

·       Lower interest rates – often more favorable than reverse mortgages

·       Full ownership and control – no lender restrictions on residency or use

·       Potential tax benefits - interest may be deductible for home upgrades

·       Straightforward terms - familiar structure for most homeowners

Cons:

·       Monthly payments required – adds a recurring expense in retirement

·       Credit and income needed – not all retirees may qualify

·       Closing costs - can be substantial depending on lender and loan size

For our couple, a $500,000 cash-out refinance on a $1.5 million home would result in a modest loan-to-value ratio of just 33%. Assuming they qualify, they could secure favorable terms and maintain full control of their home’s equity. Importantly, they avoid the tax hit of withdrawing from their IRA and preserve more of their estate for their heirs.

The Bottom Line

While reverse mortgages can be a lifeline for some retirees, they often come with hidden costs and long-term consequences that are not immediately obvious. For homeowners with substantial equity and a desire to retain control of their financial legacy, a cash-out refinance may offer a more flexible, cost-effective, and transparent solution. In retirement, liquidity is important—but so is legacy. With careful planning and the right financial tools, it’s possible to achieve both.

Disclosure: This information is presented for educational purposes only and is not intended to constitute investment, legal, or tax advice. It should not be construed as a representation that any client/prospective client has experienced or will experience a certain level of results or satisfaction. Your experience may vary based on your individual circumstances, and you should not rely upon this story when making decisions regarding your financial adviser.  Morton Wealth makes no representation that any strategies described are suitable or appropriate for any person. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.

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