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Retirement

WaPo: Reverse mortgage could be better than HELOC to fund home renovations

A columnist at the Washington Post described a reverse mortgage to a reader as a potentially better option for funding cosmetic renovations

A rise in home equity over the past couple of years has naturally caused more people to look at their homes as a potential source of cash flow, and one senior who wants to make home improvements reached out to the Washington Post through an 800-number for advice on her best path forward.

“U.S. homeowners with mortgages have watched their equity increase by about 32 percent year over year, representing an equity gain of $3.8 trillion, or an average increase of $63,600 per borrower, since the first quarter of 2021, according to CoreLogic, a real estate analytics company, writes Post columnist Michelle Singletary. “The increase in home-equity wealth is expected to spur a record amount of home-improvement spending, CoreLogic projects.”

One such person sitting on a lot of new home equity is a caller from Colorado, who asked for advice on using home equity to renovate her home for aesthetic purposes rather than functional ones or repairs. She described them as “nice to have,” and that she is 62 with no existing mortgage payment and currently lives off of investments and credit cards while an application for Social Security benefits remains pending.

The caller also has approximately $45,000 in outstanding debt from credit cards and student loans, the column reads. Based on the debt situation, Singletary describes that a Home Equity Line of Credit (HELOC) may not be the best option, and also asks if the caller has considered a reverse mortgage.

“Unlike a traditional home loan, you don’t have to make monthly payments on a reverse mortgage,” Singletary explained to the caller. “The loan isn’t paid until the homeowner moves, sells or dies. When the home is sold, any equity that remains after the loan is paid off is distributed to the person’s estate. Typically, a reverse mortgage works best if you plan to stay in your home for a long time.”

While the caller expressed reticence to the idea since she would have to remain in the home for the rest of her life, she also described that she would be comfortable there and that her family has lived in the same house for over 50 years.

“A reverse mortgage wouldn’t be a bad option,” Singletary wrote. “She could use the loan to get rid of the credit card and student loan debt and make the repairs she wants.”

Still, Singletary instead recommended going back to work.

“This is a case of being house rich and cash poor,” she writes. “I generally recommend you only cash in on your home equity when you have to make needed repairs. By that, I mean your roof is leaking, or there’s an issue that jeopardizes the safety of your home.”

Read the column at the Washington Post.