A 2024 AARP report found that 75% of Americans ages 50 and over want to age in place — meaning they’d prefer to stay in their current homes rather than relocate or downsize.
However, if you’re, say, a 57-year-old widow, you may not need the extra space that a detached home offers. You might also be tired of handling the upkeep on your own.
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One option is to downsize and move into a condo, which could reduce your workload and lower your expenses. To do this, you could sell your home and use the proceeds to purchase a condo. But with limited real estate inventory nationwide, you may be hesitant to sell your home before finding a new place to live.
An alternative — if you have sufficient home equity — is to take out a home equity line of credit (HELOC) on your current home and use that credit to purchase the condo. This way, you don’t have to sell your house before buying a new one. But is that too risky a move? Let’s dig in.
The benefits of a HELOC
One major benefit of a HELOC is the flexibility it offers. For example, if you take out a $300,000 HELOC but only use $250,000 to buy a condo, you’re only charged interest on the amount of credit you use.
Plus, HELOCs typically give you a 10-year draw period — the time when you can borrow against your line of credit.
When you buy a home or condo, you never know what expenses you might incur after moving in. If you don’t need your entire HELOC to purchase your new home, you could reserve some of the funds for unplanned repairs or desired upgrades down the line.
Also, depending on your credit score, the interest rate you get on a HELOC may be more competitive than other loan types. And if you’re hesitant to pull from your savings for a home purchase (and understandably so), a HELOC could help you maintain better liquidity.
Remember, at age 57, you may have the bulk of your savings tied up in an IRA or 401(k) plan. There can be steep penalties for withdrawing from these accounts before turning 59 1/2. So, even if you have a nice nest egg, it may not be possible to access it just yet.
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The downside HELOCs
While there are some advantages to using a HELOC to buy a condo, there are some drawbacks to consider, too. Firstly, while a HELOC gives you flexibility, you still have to pay it back.
You may have as many as 20 years to repay your HELOC. But that’s a long time to have debt hanging over your head, especially as you inch closer to retirement.
Many people aim to shed all of their debt by the time their careers end. If you won’t be able to pay off your HELOC in time for retirement, that’s just one extra expense you’ll have hanging over your head.
Plus, one pitfall you might encounter with a HELOC is that, unlike a home equity loan, your interest rate isn’t set in stone.
That means you’ll be taking the chance of interest rates rising and your HELOC payments increasing at a time when you may be moving to a fixed and lower monthly income.
Also, remember that when you sell your home, you’ll need to pay off your HELOC from your sale proceeds. This may not be a problem. But if you had other plans for your sale proceeds, you may need to rethink them.
Alternatives to consider
It’s easy to see why you may be inclined to downsize into a condo before you retire. But before moving forward, here are some alternatives to consider.
If you’ve never lived in a condo, you may not love the proximity to neighbors. And you may find that your condo fees eat away at the savings you hoped to enjoy. You might want to try renting a condo first to better understand what it’s like.
If you’re convinced you want to purchase a condo, alternative funding options may exist aside from a HELOC.
You could take out a mortgage on the condo. Or, you could sell your home first and add a contingency that the sale is dependent on you finding and closing on a condo to move into. That way, you can use your home sale’s proceeds to buy the condo outright, depending on how much money you walk away with.
Another option may be to sell your home and rent it back from your buyer until you can find, bid on and settle into a condo.
Finally, if you have substantial savings outside of an IRA or 401(k), consider paying for your new condo in cash. If you plan to sell your home right away once you move into your condo, you could reimburse your savings once the sale goes through, so you remain fairly liquid.
The good news is that there are many options. Consider things carefully and recognize that while using a HELOC may be viable in this situation, it’s not always the best option.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
