 Financing home improvements in retirement
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 Dear
Dr. Don,
I'm 64 and need $75,000 for home upgrades. I have $300,000 plus in home equity. Would it be best to refinance with an interest-only loan to keep payments down, and then possibly get a reverse mortgage or use IRA monies and pay the taxes on that distribution?
-- Larry Leverage
 Dear
Larry,
Thanks for providing some additional information about your financial
situation to me so I might better answer your question. You told
me you are married, retired, have an annual income of about $45,000
per year and have excellent credit. You also told me that your home
is worth about $550,000, and there is about $200,000 in outstanding
mortgage debt on the home. You have about $150,000 in retirement
accounts and no investments in taxable (nonretirement) accounts.
Lending limits on the two main reverse mortgage programs,
HECM, or Home Equity Conversion Mortgage, and Fannie Mae Home Keeper,
won't let you get a $275,000 reverse mortgage. That's because the
first step in getting a reverse mortgage is to pay off any existing
mortgages with the proceeds from the reverse mortgage. Put in your
particulars using the reverse mortgage calculator
at reversemortgage.org and you'll see the problem in black and white. Besides,
it's an expensive way to tap the equity in your home, and I'd like
to see you hold that option open for future use. A Bankrate
feature, "Reverse
mortgages: Retirement's on the house," explains reverse
mortgages in greater depth.
I like the idea of using a home equity line of credit,
or HELOC, even though, since it's a variable-rate loan, you are
taking on the risk that short-term interest rates continue to head
higher.
The two reasons why I like the HELOC are: The payments
are interest-only in the early years of the loan, and closing costs
are minimal. The downside is the national
average interest rate on a HELOC is currently 8.21 percent.
A cash-out first mortgage can also make sense if the
rate is competitive with the rate on your existing mortgage. The
national average for a 30-year fixed-rate mortgage is currently
6.49 percent. Saving 1.72 percent versus the HELOC rate can justify
paying the higher closing costs. Although it's not interest-only,
the extended loan term on the $275,000 loan balance should make
the payments affordable. Try the Mortgage Professor's cash
out refinancing calculator
to see which of these two options makes sense.
Since I can't give you tax advice, you should ask
your accountant whether it makes sense to draw down money from your
IRA now to reduce the loan needed for home improvements or to pay
down the principal balance on the mortgage(s), or wait until you
are required to take distributions in your early 70's. My guess
is that it makes sense to wait, but you don't want to guesstimate
this decision. For financial flexibility, if you can afford the
monthly payments on the mortgage(s), it makes more sense to keep
the IRA money invested.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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