How to use your home equity for home improvements
June 12, 2017, Rob Cooper, HousingWire.com
Whether it’s adding an accessory apartment for a live-in caretaker, widening doorways, or redesigning a bathroom or kitchen, there are many types of home modifications that can help homeowners age 62 and older live more safely and comfortably in their own homes, now and for the future.
A remodeler that specializes in accessible design can shed light on the types of home modifications that can be helpful, but what’s often less clear for many homeowners is how to best fund those projects.
For homeowners age 62 and older, a reverse mortgage loan may be the answer.
Similar in some ways to a traditional home equity loan or home equity line of credit (HELOC), a reverse mortgage loan allows homeowners who are 62 or older—and who own and live in a home that qualifies under the program—to access a portion of the equity they have built up in their home.
But one big advantage of a reverse mortgage is its flexible repayment feature: there’s no minimum monthly principal and interest payment — the borrowers can choose to make monthly loan payments, or defer repayment until they sell the home or don’t live in it anymore.
As with any mortgage, the borrower must keep up with the property’s related taxes, insurance and maintenance.
With a reverse mortgage, you can take the funds as a line of credit, monthly installments, a lump sum, or a combination of these. The line of credit option can be a good choice to fund immediate home modification needs—such as lowering countertops; bathroom renovations that include installing a stepless shower and non-slip flooring; or adding a wheelchair ramp to the home. For example: on the initial draw, the homeowner may choose to borrow enough to cover the cost of the home modifications, and leave additional funds in the line of credit so they can access them down the road as other needs develop.
Here’s a hypothetical example of how a reverse mortgage could use it for home improvements:
- Your home is worth $250,000
- You qualify for a loan of $144,000
- Your home renovation costs $70,000 (cash out)
- After renovation, you’d have an $68,001 line of credit
Better yet, unlike a traditional HELOC, with a reverse mortgage the unused portion of the line of credit will grow in size each month, regardless of home value. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on the loan.
Today, nearly all reverse mortgages—which are issued by private lenders—are insured and regulated by the Federal Housing Administration through its Home Equity Conversion Mortgage (HECM) program. The beauty of an FHA-insured reverse mortgage is it’s a non-recourse loan, which means neither the borrower nor their family will ever be required to pay back more than the sale price of the home.