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More than three-quarters of adults 50 and older want to stay in their homes long-term, according to an AARP survey. What’s more, homeowners in or nearing retirement — age 62 or older — are sitting on a collective $10.6 trillion in equity, the National Reverse Mortgage Lenders Association reports. For this group, that equity might help fund aging-in-place renovations that allow them to remain in their current home instead of moving to a more accessible property.
Cash-out refinance for aging-in-place remodeling
A cash-out refinance could help pay for a full-scale aging-in-place remodel, such as installing an elevator or stairlift, no-slip flooring or ramps, lowering countertops and widening hallways These whole-house projects can total as much as $50,000, according to estimates from Fixr.
In a cash-out refinance, you refinance your existing mortgage, replacing it with a new loan that includes the balance of the current loan and any cash you decide to withdraw from your home’s equity. Most cash-out refinance lenders allow you to withdraw up to 80 percent of your home’s value.
Let’s say your home is worth $450,000 and you have $200,000 left to pay on your mortgage. If you do a cash-out refinance with an 80 percent loan-to-value (LTV) ratio, you could borrow up to $360,000. That’s enough to refinance your $200,000 existing mortgage and obtain $160,000 in cash.
What to know about cashing out before or during retirement
The upside of a cash-out refinance is that you can access your home’s equity without needing to sell it — a big plus if moving isn’t part of your long-term plans. You can use the cash for any purpose, as well, and you might be able to take advantage of certain tax benefits, such as:
- Deducting the cost of home improvements related to medical conditions or that add value to the home (keep in mind, some accessibility improvements won’t be as desirable to younger buyers)
- Credits for energy-efficiency improvements
In addition, if you obtained your mortgage several years ago, you could get a lower rate now by refinancing — although this option has become increasingly unlikely in today’s market as rates rise.
One big question, though: Should you get a home loan in retirement? If you take out another 30-year loan, for example, in your 60s, where does that leave you if you have a fixed income? Can you afford the higher monthly payment?
In a similar vein, will your heirs be able to manage the payments if the worst happens, or will they have to sell the home? Before taking cash out, carefully consider what it would mean for you to take on new debt at this stage.
Other ways to pay for aging-in-place remodeling
Whether you need to make renovations for health reasons or want to complete improvements simply to make aging in place more comfortable, a cash-out refinance isn’t the only option. Here are others to consider:
- Cash flow or savings – In many cases, seniors have income from pensions, Social Security and full- or part-time employment — in fact, more than 10 million Americans 65 or older continue to work, according to the Labor Department. If you fall into this category, you might be able to remodel gradually given this ongoing cash flow, paying for one or more projects out-of-pocket each year. You could take this approach if you have savings to draw from, as well. If there’s a chance you might move in the short term, say the next five to seven years, paying cash could be the right strategy.
- Second loan – With a home equity or second loan, you can keep your current financing. This’ll give you access to cash without losing the lower rate on your existing mortgage. Generally, it’s best if the home equity loan amount is smaller than the balance of the first mortgage.
- Home equity line of credit (HELOCs) – With a HELOC, you’ll also be able to retain your current financing. HELOCs are similar to credit cards with adjustable rates, but have two phases: The borrower can take money out and put money back in during the first phase, a period of 10 to 15 years usually. In the second phase, say another 10 years, the borrower repays any debt remaining from the first phase with monthly payments. The trick is ensuring you’ll have the funds in the future to repay what you borrow — you might not have the same income, for example, or have more expenses 10 years from now.
- FHA 203(k) loan – Depending on the type of 203(k) loan, you could borrow up to or more than $35,000 to make repairs for accessibility, health or safety reasons. There are qualification criteria for FHA loans, including credit score minimum and and a debt-to-income cap, and for a 203(k) loan, you’ll need to begin the work within 30 days of closing and complete it within six months.
- FHA Title I financing – FHA Title I loans are designed for projects that “substantially protect or improve the basic livability or utility of the property,” according to the Department of Housing and Urban Development (HUD). If you have a single-family home, you could borrow as much as $25,000 through this program and repay it over 20 years. If your project doesn’t require that much investment, however, you could borrow less than $7,500 on an unsecured basis, meaning you won’t have to put your home up as collateral.
- Reverse mortgage – If you’re age 62 or above, one final option might be a reverse mortgage, typically a Home Equity Conversion Mortgage (HECM). This is financing with no monthly payment — the debt plus accrued interest is due when the borrower sells or moves out of the home or passes away. You must still pay property taxes, homeowners insurance and HOA fees, however. If you struggle with having sufficient cash flow (now or in the future), this might be the best plan.