Money Research Collective’s editorial team solely created this content. Opinions are their own, but compensation and in-depth research determine where and how companies may appear. Many featured companies advertise with us. How we make money.
5 Things to Know Before Using a Reverse Mortgage for Home Repairs
By Mallika Mitra MONEY RESEARCH COLLECTIVE
Whether you’re dealing with a leaky faucet, damage to your roof or electrical issues, the cost of home repairs can add up.
Annual spending for home improvements and repairs is projected to hit $477 billion next year, according to the Joint Center for Housing Studies of Harvard University. As repair costs have climbed in recent years, even basic projects can take a bite out of your budget. That’s especially true for older homeowners who may be living on a fixed income.
One possible solution? Reverse mortgages. These unique loans allow older homeowners to borrow money from a lender by using equity in their home as security, and you don’t need to pay the loan back until you no longer live in the home. In other words, you can borrow without adding a new bill to your monthly budget.
Reverse mortgages, though, are complex financial tools, and you’ll need to do your research before determining if they’re the right solution for you. Here are five things to know before using a reverse mortgage for home repairs.
1. You may need to make repairs before getting the reverse mortgage
You can’t simply sign on the dotted line and get a reverse mortgage. The Federal Housing Administration has several key requirements you’ll have to meet to qualify for a Home Equity Conversion Mortgage (HECM), which make up the bulk of reverse mortgages.
One requirement to know if you’re considering getting a reverse mortgage for home repairs is that your house has to already be in good shape. That doesn’t necessarily mean it has the most up-to-date kitchen appliances or freshly-painted walls, but it does have to be in a safe, livable condition — no roofs that are going to cave in or dangerous mold, for example. The lender will hire an appraiser to assess the value of a home, and they may require you to make repairs so that the home meets the Department of Housing and Urban Development’s (HUD) minimum property standards either before or after you receive the loan.
2. The lender may set aside money for repairs after closing
If repairs need to be done soon but they don’t need to be done before the reverse mortgage is finalized, the lender may require a portion of your loan be set aside to make repairs.
If that’s the case, the agreement has to meet HUD’s standard for repair set-asides. The HUD rules require that repairs must cost less than 15% of the total loan and that the amount set aside is equal to at least 150% of the cost of repairs, plus the repair administration fee.
Those repairs also have to be completed within a year of the loan closing, and HUD’s representatives can inspect your home to make sure they’ve been done.
3. There other requirements to be eligible for a reverse mortgage
Aside from having your home in good shape, there are other requirements you’ll need to meet to qualify for a reverse mortgage. Those include being at least age 62, owning the home outright or having a substantial amount of equity (typically 50% or more), and using the home as your primary residence and more.
Once you have the loan, your homeownership responsibilities don’t end. You’ll have to make sure you pay your property charges like taxes and insurance on time, maintain the home as your primary residence and repair it as necessary. While it’s uncommon, the lender does technically have the power to inspect your home to make sure you’re maintaining it, and if they send you notice that you need to make repairs, you have 60 days to start, according to the Consumer Financial Protection Bureau.
4. Reverse mortgages are not for everyone
Reverse mortgages can be a useful tool for homeowners looking to turn equity in their home into cash, but they’re not for everyone.
For one, these loans are best-suited for older adults who want to age in place. If you’re not planning to stay in your home long term, then you need to carefully consider whether the costs associated with a reverse mortgage — which include origination fees, closing costs and mortgage insurance — are worth it.
Reverse mortgages can also affect others living in your home. When the loan becomes due — typically after the homeowner moves out or passes away — the property is used to repay the lender. While there are protections for eligible spouses, other family members living in the home may need to move out, or, if the home is inherited, heirs will need to repay the loan to retain ownership.
5. There are other financing options
A reverse mortgage may make sense for covering home repairs, but it’s not the only option in your toolkit.
Other possibilities include a home equity loan or home equity line of credit (HELOC), both of which allow you to access cash by borrowing against your home’s equity. Refinancing your mortgage is another option, potentially lowering your monthly payments or using a cash-out refinance to fund home improvements. These alternatives do involve monthly payments, whereas reverse mortgages do not. But depending on your financial goals and ability to manage payments, one of these options may better suit your needs.
Reverse mortgages, on the other hand, offer a unique perk in that they provide you with loan proceeds without requiring any payments.
As with any major financial decision, getting expert insight from a financial planner who can help you consider all your options is smart. And if you do choose to go with a reverse mortgage, make sure to shop around so you find the best lender for you.