Using Your Home Equity for Aging in Place

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A new Bankrate survey says 62 percent of homeowners never plan to move. If you’re one of those who'll be aging in place, you may be considering using your home equity to help do it, by taking out a reverse mortgage, a home equity line of credit (HELOC) or a cash-out refinance of your first mortgage. That might be a good idea, but you’ll want to know the pros and cons before making your decision.

Five experts offered smart advice about using home equity (the difference in the market value of your home and how much you owe) to age in place at a Next Avenue/National Reverse Mortgage Lenders Association (NRMLA) webinar I moderated Tuesday (you can watch it above). They answered questions from Next Avenue readers and some of the nearly 200 webinar attendees. Below, I’ll pass along their key points.

The panelists:

• Steve Irwin, executive vice president of National Reverse Mortgage Lenders Association
• Marguerita Cheng, a Certified Financial Planner, Retirement Income Certified Professional and CEO of Blue Ocean Global Wealth
• Nick Clements, co-founder and general manager of the personal finance site Magnify Money
• Amy Ford, senior director of home equity initiatives and social accountability for the National Council on Aging
• Dan Hultquist, co-chair of the National Reverse Mortgage Lenders Association education committee, vice president of education and organizational development at Live Well Financial and author of Understanding Reverse, a book on reverse mortgages

Irwin noted that home equity often represents the largest component of personal wealth. In fact, he added, homeowners age 62 and older (the population eligible for reverse mortgages) have $6.6 trillion in home equity.

“There are real opportunities to responsibly leverage your equity to help fund retirement,” said Clements. "But it can be confusing.” Clements urged keeping your eyes open before you open your wallet. “There are many actors with significant profit motives who can make a lot of money when you take out a loan," he said.

Cheng advised potential borrowers to “take a holistic approach to financial planning and recognize that the home and home equity is an asset to consider in a comprehensive financial plan.” She echoed a point that American College of Financial Services taxation professor Jamie P. Hopkins made in his new book, Rewirement. Hopkins wrote: “Taking strategic measures to deal with an existing mortgage can also improve a retiree’s financial situation.”

You’ll want to be sure to understand the differences between the way a reverse mortgage, a home equity line of credit and a cash-out refinance work.

With a reverse mortgage like the Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration (FHA), a lender lets you borrow against your home equity tax-free while you live in the home and interest accrues. The current interest rate is roughly 4.7 percent. You can take the money as a lump sum or a line of credit to tap when needed (for say, a home improvement to age in place or a financial emergency). The FHA insures reverse mortgages for homes with assessed values of up to $679,650.

Before getting a reverse mortgage, you’ll be required to meet with a U.S. Department of Housing and Development-certified counselor, who will review the pros and cons.

You don’t need to own your home free and clear to qualify for a reverse mortgage. In fact, Hultquist said, “the vast majority” of borrowers use the loan proceeds to pay off an existing mortgage. You can also buy a home using a reverse mortgage through what’s known as the HECM for Purchase program, Hultquist noted.

You aren’t required to make principal and interest payments on a reverse mortgage while you’re living there, but if you don’t, the balance will grow over time. The loan must be paid off after you move, sell the home or die.

You don’t need current income to qualify for a reverse mortgage, Hultquist said, but you must pay property taxes and homeowners insurance on time or you will lose the home and the loan. A lender will evaluate your ability to make those payments based on your credit history, the timeliness of your property tax payments in the past and your “residual income” (your monthly income after debts and expenses). If the lender has concerns, it may withhold a portion of the reverse mortgage proceeds (known as a life expectancy set-aside) to make the property tax and insurance payments. Generally speaking, the higher your property taxes and the younger you are, the more the set-aside amount would be.

The maximum size of a reverse mortgage depends on the home’s appraised value, the age of the youngest borrower and current interest rates, Irwin said.

You’ll never owe more than the value of the property. You will, however, owe closing costs, which can be paid upfront or added to the amount of the loan. A lender can charge an origination fee of the greater of $2,500 or 2 percent of the first $200,000 of your home’s value plus 1 percent of the amount over $200,000, with a maximum fee of $6,000. Some lenders waive or reduce the fees on certain products, NRMLA says.

There’s also a mortgage insurance premium, or MIP. Due to new rules from the Trump administration, the MIP paid upfront now equals 2 percent of the home’s appraised value or the FHA lending limit, whichever is less, and the annual MIP fee is 0.5 percent of the outstanding loan balance. Other closing costs include: an appraisal fee; a credit report fee; a flood certification fee; an escrow, settlement or closing fee; a document preparation fee; a recording fee; a courier fee; title insurance; a pest inspection fee and a survey fee. The total of these can easily exceed $1,000.

“If you don’t want to stay in your home for a long time, a reverse mortgage may not be right for you,” Hultquist noted.

Cheng also said that although a reverse mortgage won’t impact your Medicare coverage, it’s possible that the loan could prevent you from qualifying for Medicaid.

Unlike a HELOC, a reverse mortgage can’t be frozen or reduced just because property values have dropped. “I lost my HELOC due to what happened to property values in 2007-2008,” said Hultquist.

A home equity line of credit, Clements explained, is a revolving line of credit that uses your home as collateral. The current interest rate is between 4.5 percent and 6 percent if you have good credit. “Banks have really tightened up since the 2008 financial crisis,” said Clements. “Rates vary a lot, so it pays to shop around.”

HELOCs have adjustable rates. “Given that we live in a rising rate environment, that’s something to keep in mind,” said Clements.

Typically, a HELOC has an initial drawdown period of 10 years with interest-only payments. After that, the loan converts to an installment loan.

You’ll need a strong credit score and enough current income to meet your living expenses in order to qualify for a HELOC, Clements added.

When deciding between a HECM or a HELOC, Ford advised, “think of the key product features and the value you can gain from them.”

A cash-out refi, Clements said, is underwritten like a new mortgage, so the interest rate will be what you’d pay for a standard mortgage. One caution: “If you are almost done paying off your mortgage, a cash-out refi will reset the term of the loan to 15 or 30 years,” he said.

Ford wrote a useful article on the National Council on Aging site to help you compare alternative forms of debt for aging in place: “Considering Tapping Your Home Equity? Compare Your Options First.” Her group also has a good, free online booklet about reverse mortgages, Use Your Home to Stay at Home.

You can find information about reverse mortgages on the NRMLA site and the site of the federal Consumer Financial Protection Bureau, too.

The last question the panelists fielded may have been the most ticklish: How do most kids feel about their parents tapping into their equity and why?

“This is a tough personal decision that families will have to consider,” said Irwin. “But NRMLA research has found that 90 percent of adult children prefer their parents age comfortably in place.”

Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More