Should you get a reverse mortgage to remodel your home?
Remodeling affects your reverse mortgage
- Reverse mortgages are more practical the longer you remain in your home.
- The more equity you have, the more useful a reverse mortgage can be.
- A HECM for Purchase helps you access equity for a new home that requires fewer improvements.
- Renovation projects can significantly impact your property tax and homeowners insurance.
If you’re 62 or older, you are eligible for a reverse mortgage. This might prompt you to consider the untapped equity in your home for a large expense, such as home-improvement projects.
Some home-renovation projects stem purely from necessity. Older homes may need upgrades, such as a water heater, new roof or air-conditioning system. Maybe you want more cosmetic changes — wouldn’t it be nice to have a new hot tub, master bathroom or outdoor patio? You may also be thinking of mobility issues, such as a motorized stair lift or ramps to conquer stairs, or walk-in showers to avoid slipping in the bathtub.
Regardless of the nature of your project, there are plenty of things to think about before utilizing a reverse mortgage to free up the needed cash.
Aging in place
One of the most important factors to consider before getting a reverse mortgage is the concept of aging in place. Many seniors will prefer to stay where they are, especially if they’re in a good financial situation, have a large amount of equity and are capable of ensuring the home is maintained.
Generally speaking, the longer you plan to stay in your home, the more practical a reverse mortgage becomes. Reverse mortgages offer flexible distribution options. While some homeowners might choose fixed monthly distributions, others with more immediate financial needs — such as home improvements — can choose a lump-sum payment or a line of credit.
There are other options, of course, for accessing equity. Cash-out refinancing, home equity loans and home equity lines of credit are available through a variety of national, regional and community lenders. These types of loans generally offer lower interest rates and, unlike reverse mortgages, don’t involve mortgage insurance premiums. The Federal Housing Administration (FHA) insures the vast majority of reverse mortgages in the U.S. through its Home Equity Conversion Mortgage (HECM) program. HECMs include both upfront and annual insurance premiums that can substantially lower the amount of equity you’re able to access.
However, reverse mortgages offer a major benefit that other loan types don’t: You won’t have to repay a reverse mortgage until you sell the home or can no longer use it as a primary residence. The amount owed on the reverse mortgage is recouped by the lender when the house is sold and the homeowner cannot pay more than what the property is worth.
There are situations in which using a reverse mortgage to remodel your home may not make sense. If you own an older home that requires expensive repairs, there may not be enough equity to cover the upgrades. In these cases, a HECM for Purchase could be the solution.
The FHA instituted the HECM for Purchase program in 2008. The program allows seniors to qualify for a reverse mortgage on a new home, rather than on their existing home. If you can cover the new home’s appraised value and a down payment, typically financed through the sale of your old home, you may wind up in a win-win situation: A home with few or no renovation needs, and the freedom of having no monthly mortgage payments. Additionally, a HECM for Purchase can save money as you’re rolling two sets of closing costs into one transaction.
Downsizing is another common reason for obtaining a HECM for Purchase. If a smaller home makes sense, this type of loan can help you leverage the equity in your current home. And most types of homes are eligible for the program, including single-family homes, townhomes, condominiums and FHA-approved mobile and manufactured homes. Some examples of properties you cannot buy with a HECM for Purchase include co-ops and homes that are less than a year old.
Taxes and insurance
If you choose to renovate and stay in your current home, you may add value to your property. Be aware that you may incur additional expenses, a drawback that shouldn’t be overlooked.
Depending on where you live and what your local jurisdiction includes in its property-tax assessments, your renovation project may significantly boost the value of your home and, consequently, the amount of tax you’ll pay. Here are some common improvements that trigger reassessments:
- Additions that increase square footage, including work to finish an attic, basement or garage
- Full-scale or partial interior renovations, including a new bedroom, bathroom or fireplace
- Outdoor work such as decks, sheds and regraded yards
Your homeowners insurance policy may also be impacted by substantial renovations. The Insurance Information Institute recommends contacting your insurance agent before starting improvements. Tell them about your plans so they can update your policy. Additional home value can mean higher premiums to cover the potential costs of rebuilding. And you may want liability protection if you’re planning to do the work yourself.