Should You Use a Reverse Mortgage to Renovate Your Home?
A reverse mortgage can be used to tap into home equity, and can allow aging Americans to remain in their homes. The proceeds of a reverse mortgage, including the line of credit option taken by many reverse mortgage borrowers today, can also be used for a very important purpose: home improvements.
Whether updating features to maintain your home’s value, or preparing it as more aging-friendly, a reverse mortgage is one way to help you renovate your home.
Roof repairs or replacements, as well as kitchen and bathroom renovations are three common home improvements made using reverse mortgage proceeds, says Dennis Loxton, certified financial planner and regional vice president of Plymouth, Michigan-based 1st Financial Reverse Mortgage.
But before you sign on the dotted line — or even sit down with a reverse mortgage specialist — there are a number of considerations to take into account.
“From our perspective, we’re going to advise borrowers to A) make sure you’re dealing with licensed contractors; B) make sure it’s worth what you’re putting into it — sometimes I’ll advise them to talk with a realtor to determine if you’re going to put another $30,000 into your home, that you’ll get some level of it back out — or C) that you’re staying here for the long haul,” Loxton says.
With those in mind, Loxton suggests borrowers also take the following steps before using a reverse mortgage to make home improvements.
1. Ask Yourself: ‘Should I Stay or Should I Go?’
The first step in deciding whether to take out a reverse mortgage to help fund home repairs and renovations is to determine whether or not you want to stay in your home for the duration of your retirement.
“As a lender, we have that conversation with them,” Loxton says. “When people ask me, ‘Should I stay or should I go?’ one of my first questions is, ‘Do you really want to stay in this house for the next 10, 15, 20 years?”
Given that the average life expectancy in the U.S. is 78.8 years, that means you could live another 16 years or more after taking out a reverse mortgage, if you decide to do so when you first become age-eligible at 62.
“Conversely, I talked with a couple recently who has a 4,100-square-foot home and is looking to use a reverse mortgage to pay off their forward mortgage and use the cash flow to reinvest back in the house,” Loxton says. “[They] have a 25- or 30-year-old home that needs significant updating. In their situation, I asked, ‘Have you thought about just selling and moving?’”
For some homeowners, it doesn’t make sense to use a reverse mortgage to make substantial home repairs. But for others, it could be the perfect way to age in place. Talking with a reverse mortgage specialist can help you decide if the loan is appropriate in your situation.
2. Consider the Alternatives
If you’re concerned that your home may need more work than it’s worth, you can use a reverse mortgage to buy a new home in retirement without a mortgage payment. That’s the goal of a HECM for Purchase.
A HECM for Purchase allows seniors age 62 or older to purchase a new principal (or primary) residence using loan proceeds from the reverse mortgage. To do so, you must have a down payment large enough to pay the difference between the HECM proceeds and the sale price, plus closing costs for the property you are purchasing.
If you are downsizing, you may be able to generate enough money from the sale of your previous home to pay for this down payment.
The loan amount you are eligible for depend on a few factors: your age, the value of the new home and the amount of the down payment.
“Sometimes people should leave [their current homes],” Loxton says. “If they think the house is going be too much for them, then the reverse for purchase may be a more appropriate tool to use for their next home.”
Alternatively, you could use a home equity line of credit, or HELOC, to make home improvements. However, these loans require that you make monthly payments, whereas a reverse mortgage only requires the loan to be repaid once the house is sold or the borrower dies or moves out for a period of 12 months or longer.
“When people ask, ‘Should I do a HELOC or a reverse mortgage?’ my first questions are, ‘Can you qualify for a HELOC and do you have the cash flow to support it?’ For those folks that have high amounts of equity in their properties, they’re going to be limited in what they can take out in the first year with the reverse mortgage. But the benefit of a reverse is the lower mortgage insurance premiums [MIPs] and your upfront costs are lower.”
3. Do Your Homework
So you’ve decided you still want to use reverse mortgage proceeds to renovate your home. Now what? Do your research, Loxton says.
First, you should understand the costs of the home improvements you’re planning to make.
“Make sure you’ve done your homework and have a few different quotes before you even apply for the reverse,” Loxton says. “One of the things you want to avoid is [a situation in which] the repairs started as an $8,000 to $10,000 update, but they morph into a $50,000 production. If you haven’t done your homework and know that a reverse mortgage will only give you X in your first year, you have to have a contingency plan.”
Have the cost of the repairs budgeted beforehand so you know what you’re getting into, he says.
Additionally, verify your contractor’s credentials to avoid scams and faulty repair jobs.
“I would certainly encourage clients to make sure that they’re only dealing with a licensed contractor, check them out with the Better Business Bureau, and ideally try to find people that have prior track records of working in their neighborhood,” Loxton says. “Unfortunately, home repair scams are one of the most common scams on the planet — especially in states like Florida. So check their licenses, references and track record.”