February 29, 2016 by HECM Pro
If you’re 62 or older, a HECM reverse mortgage is a fantastic tool for financing home improvements because it doesn’t require a monthly payment and you don’t have to pay the money back for as long as you live in the home. No other home loan program out there offers that.
Your obligation under the HECM program is to simply maintain the home as your primary residence (don’t turn it into a second home or rental) and pay required property charges such as property taxes and homeowner’s insurance.
What kind of home improvements can you do? Pretty much anything! If you can dream it up, the HECM may be able to make it happen. Many homeowners use HECM proceeds to remodel kitchens or bathrooms, upgrade to hardwood flooring or ceramic tile, build workshops, replace landscaping, install solar panels, or add on rooms.
Homeowners with disabilities often choose to make their homes more accessible and enjoyable to live in by widening doorways and installing ramps, walk-in bathtubs, and safety rails.
Again, the possibilities are endless. You’re free to use the cash however you wish.
Options for Receiving the Funds
A HECM reverse mortgage is highly customizable, so the proceeds can be distributed in several ways depending on your goals and needs:
- Lump sum: Loan proceeds are paid at closing in one lump sum payment.
- Line of Credit: Loan proceeds are made available as a line of credit that you can tap as needed. Whatever you have available in the line of credit will automatically accrue growth and grow larger over time. This is very similar to the HELOC, which is commonly used for home improvements.
- Monthly Payment: Proceeds can be paid to you as a monthly check for life or a set period of time.
You also can go with any combination of all three.
If you have some projects you’d like to get done right away, it’s probably a good idea to take a lump at closing so you have the cash on hand immediately. If you’re planning to wait months or years before starting a project, it’s probably best to leave the funds stored in a line of credit until you’re ready to use them.
You might also opt for a monthly payment if you have a long list of smaller projects and need a smaller amount of funds coming in consistently every month.
A Better Alternative to a HELOC
A home equity line of credit, or HELOC, is a common way for many homeowners to finance home improvements. They’re relatively easy to get, rates and fees are typically pretty low, and payments are usually interest-only. However, they do have a few “catches” that can make them risky for borrowers over 62 who are living on a fixed income:
- Monthly payment: A HELOC requires a monthly payment, and the more you borrow, the larger your payment becomes.
- Variable interest rate: Not all HELOCs have a variable rate, but many do. Rates are low now, but if you borrow a large amount of money on your HELOC and rates increase in the future, your payment could increase substantially as well. If you’re on a fixed income, this could put your home at risk if you fail to keep up with the payments.
- Recast: Banks won’t let you draw on the HELOC forever. At some point in the future, usually at the 5- or 10-year mark, the bank will freeze your available credit and require you to start paying back what you’ve borrowed over a relatively short period of time. This can make your payment jump by hundreds of dollars per month. Again, if you’re on a fixed income, this could put your home at risk if you fail to keep up with the payments.
- The bank can revoke or chop your HELOC: Just because your HELOC is available now, there’s no guarantee it always will be. If the bank feels it’s too risky for you to have access to all that credit, they can freeze or chop your credit line, which means you don’t have access to any more money. This could be a big headache if you’re half way through a big project and the bank revokes your credit. And don’t assume you’re immune from this just because you have stellar credit. Many wealthy and very well-qualified homeowners with excellent credit lost their HELOCs in the financial crisis of 2008.
If you’re 62 or older and considering a HELOC on your primary home to do home improvements, consider looking at the HECM reverse mortgage instead. A reverse mortgage can be structured very similarly to a HELOC, but the big difference is that it never requires a payment and your available credit can’t be revoked or chopped as long as you uphold your obligations under the program.
Even better, your available credit line will increase automatically over time at a compounding rate!
Minimum Property Standards
Though a HECM reverse mortgage can be a great tool for financing home improvements, your home still must meet minimum FHA standards. If your home is a complete wreck, it’s probably going to be tough to get a reverse mortgage even if your plan is to use the proceeds to renovate it back to livable condition.
This doesn’t mean your home needs to look like a new model home, but it does need to be in at least reasonably decent condition. If you have peeling paint, broken windows, holes in walls, leaking roof, missing floor, foundation cracks, etc., it’s possible your lender won’t fund your HECM until those issues are resolved.
On the other hand, if your home is in good condition but maybe needs a fresh coat of paint, some new carpet, or some new appliances, you’ll probably be fine.