Did you know you can use the funds from a reverse mortgage to renovate your home?

The equity you unlock with a reverse mortgage can be used however you choose, including putting it back into your home to boost its value and make it a safer space to age in place.

Let’s take a look at the factors borrowers should consider before using a reverse mortgage for home renovations.

How does a reverse mortgage work?

A traditional mortgage is a “forward” mortgage, meaning the borrower puts equity into the home as they make their monthly payments.

A reverse mortgage pulls from the equity that you have diligently built into your home from years of mortgage payments and eliminates the need to make any more payments.

Reverse mortgage balances are not due until the borrower moves out, sells the home or passes away.

The most common type of reverse mortgage is the home equity conversion mortgage (HECM) backed by the U.S. Department of Housing and Urban Development (HUD).

The amount received from a reverse mortgage depends on the following factors:

• Borrower’s age: Reverse mortgages are designed for borrowers aged 62 or older, and loan amounts are generally higher for older borrowers
• Home value: The higher the appraised value, the more equity is available to the borrower
• Interest rates: Higher interest rates can reduce the amount available
• Maximum loan amount: There generally is a limit to how much you can borrow

Your reverse mortgage lender will help you calculate exactly how much equity you can access with a loan.

Can you use a reverse mortgage for home renovations?

Borrowers can use reverse mortgage funds for any purpose of their choosing, including home renovations.

Renovations or repairs might include upgrading the kitchen or bathroom, fixing the roof or making the home more accessible.

Reverse mortgage borrowers should consider projects that both add value to the property and improve the home’s functionality and comfort.

By choosing renovations that add value, homeowners can increase the resale value of their property and potentially recoup a higher percentage of the renovation costs when they sell the home or pass it on to heirs.

Considerations for using a reverse mortgage for renovations

The decision to use a reverse mortgage for home renovations requires thoughtful consideration of your home needs, the potential added value, the impact on your loan balance and your long-term plans.

Are you intending to stay in the home long-term?

The most important consideration for using a reverse mortgage for home renovations is whether you intend to age in place in your home.

If your retirement plans include selling the home or you anticipate that you’ll someday move to an assisted living community, a reverse mortgage may not make sense.

Discuss your plans with a trusted mortgage lender such as Compass Mortgage to determine the loan option that’s best for you.

What are your renovation needs?

A borrower’s renovation needs should take into account their priorities and long-term goals.

To evaluate your renovation needs:

• Assess the current condition of your home
• Categorize and prioritize essential repairs and non-essential upgrades
• Consider aging-in-place modifications
• Establish a budget based on available funds
• Consult with contractors

Borrowers should consider which projects are necessary for their comfort and safety as they age, as well as which projects will add value to the property.

Will the renovations add value to the property?

Addressing the borrower’s immediate needs is crucial, but the homeowner must also consider which renovations translate into a long-term investment in their home’s value and appeal.

The home’s future value is especially important if the borrower intends to pass the home to their heirs.

The following types of renovations are known to improve a home’s value:

• Kitchen remodel
• Bathroom remodel
• Energy-efficient upgrades
• Curb appeal enhancements such as landscaping, new front doors or new siding
• Finished basements
• Open floor plans
• Hardwood floors
• A fresh coat of paint throughout the home
• Accessibility improvements such as ramps, grab bars or step-free entries

Discuss high-value upgrades with a local real estate agent who can offer insights into local buyer trends and preferences.

How will the renovations impact your loan balance over time?

Renovations that contribute to a growing loan balance will impact a borrower’s available home equity.

Understanding this impact is essential, especially if you have specific plans for using the remaining home equity in the future.

By carefully planning the renovation expenses, homeowners can optimize the use of reverse mortgage funds while considering the potential long-term consequences of the loan.

How to qualify for a reverse mortgage

To access home equity with a reverse mortgage, borrowers must meet the following requirements:

• Age 62 or older
• Significant amount of equity in the home (generally 50% or more)
• Home is the primary residence
• Home is a HUD-approved property type
• Must take HUD-approved reverse mortgage counseling
• Must meet lender requirements for credit score, income and assets

Borrowers can access the cash as a lump sum, line of credit or monthly payment.

Alternatives for tapping into home equity

Even if a reverse mortgage isn’t the right option, borrowers still can unlock their home equity through other means.

Home equity loan

Borrowers can tap into their home equity using a home equity loan (HEL) or home equity line of credit (HELOC).

The key benefit of a reverse mortgage is that it eliminates monthly mortgage payments, while a HEL or a HELOC will add a payment.

However, if the main reason a borrower is using a reverse mortgage is for home improvements and they have the cash to repay the loan, a HEL or HELOC could work.

Downsizing

Sometimes, downsizing is the best option for a homeowner.

If you find that your home needs too many improvements and is larger than you need, it may be smart to find a smaller home in which you can age in place comfortably.

The difference between the sale proceeds and the cost of the new home can be used as cash for various purposes.

Homeowners also may be able to access additional savings through reduced monthly expenses.

Compass Mortgage can match you with the perfect loan

Compass Mortgage offers our borrowers a simple, personalized loan process backed by the convenience and power of industry-appropriate technology.

We care about and value your financing needs and promise to be your partner and advocate throughout every step of the process.

Apply now to unlock your personalized loan options and discover if using a reverse mortgage for home renovations is right for you.