I’m a Real Estate Agent: Here Are the 8 Best Ways To Fund Your Renovations During Retirement
You’ve decided you want to stay long-term in your current home, and perhaps even make it your “forever home.” But to make aging in place more comfortable, you want to renovate. How do you pay for them as a retiree? The good news is that you have plenty of options, which is also the bad news. Consider the pros and cons of each option to fund home renovations in retirement. 1. Grants & Specialty Loans for Seniors The best way to pay for home renovations is, well, not to pay at all. Let someone else pay for it. Rhett Stubbendeck, founder of financial planning firm Leverage, points out that you may have more options than you realize. “Check out government programs and grants. There are many available, especially for accessibility upgrades. At Leverage, we’ve helped clients secure these funds to reduce out-of-pocket costs.” Don’t stop at federal programs, either. Many of the most generous programs operate at the state or local level. In particular, many of these programs help cover the cost of age-related accessibility or energy efficiency upgrades. Get creative in combining these together. If you can’t find a grant, you may find a subsidized loan program to help you score a low-interest, low-fee loan to cover the home improvement costs. 2. Cash Could you pull together enough cash to cover most of the renovation costs? Avoid taking on fresh debts in retirement if you can. Look under every proverbial cash cushion to see if you can cobble together the funds. “Paying in cash is the best choice if it doesn’t interfere with other financial goals or exceed your budget,” advises Michael Kotler, a Realtor in Hoboken New Jersey, If you can get most of the way there with cash, you may be able to close the gap with credit cards. 3. Credit Cards It sounds unconventional, and it is. But paying for home upgrades by credit card can still potentially save you money over HELOCs, home equity loans, and refinancing (more on those shortly). “When you borrow a home loan or home equity line of credit, it’s secured by a lien,” explains Luke Babich of Clever Real Estate“ That requires a title search and a formal loan settlement, which often add up to over a thousand dollars in fees. And that says nothing of lender fees, which rack up quickly. “Sure, you’ll pay higher interest rates on credit card debt than a HELOC. But if you can pay off the card balances relatively quickly, the higher interest could still cost you far less than the thousands in settlement costs.” Some credit cards offer introductory 0% APR periods as well, perhaps giving you up to 18 months to pay off the balance interest-free. Bear in mind that you can pay for materials yourself, directly on your credit card, and many contractors accept credit card payments if you pay a convenience fee. 4. Personal Loans Another unconventional financing option includes personal loans. Like credit cards, they charge higher interest than secured loans but let you avoid expensive settlement fees. “Personal loans are also an option, especially for smaller projects,” points out Stubbendeck. “They don’t use your home as collateral, making them simpler but typically with higher interest rates.” 5. HELOCs A home equity line of credit or HELOC offers a flexible funding source. You can draw on it as needed, and pay it back at your own pace (at least until it rolls over to a fixed repayment term). Real estate agent Michael Kotler explains further. “If you’re not sure what the total renovations costs will be, a HELOC, or home equity line of credit, may be the best choice, as it lets you withdraw funds as needed, and you can make minimum monthly payments on the amount you borrow.” 6. Home Equity Loans Kotler continues: “Conversely, a home equity loan may be best if you know the exact cost of your project, as it provides a lump sum upfront.” Home equity loans usually take the form of second mortgages if you already have a first mortgage against the property. Just beware that you do incur settlement fees, as outlined above. 7. Cash-Out Refinancing “A third option using your home’s equity is a cash-out refinance, especially if the mortgage interest rate is lower than your current mortgage,” says Kotler. “If you need a large loan and plan to stay in your home long term this may be for you. You take on a larger loan, pay off the existing mortgage, and get a new one which gives you cash to pay for the renovations.” Expect higher lender fees however. Lender points equal one percent of the loan amount — a much higher figure when you refinance your entire mortgage. Also beware that you extend your debt horizon many years into the future. 8. Reverse Mortgages If you plan to stay in the home forever, and don’t want the burden of a mortgage payment, you can borrow money with a reverse mortgage. “For retirees over 62, a reverse mortgage can be a smart choice,” notes Stubbendeck. “It allows you to access your home equity without monthly repayments. This is perfect if you plan to stay in your home for a long time.” Reverse mortgages come with their quirks, so make sure you understand the terms before signing on the dotted line. You could receive a lump sum upfront, ongoing monthly payments from the lender or a combination of the two. Get clear on when monthly payments will end and what you can otherwise expect — and what the lender expects from you. Final Thoughts Debt is a tool, and like any tool, you can use it to your advantage or cut yourself with it. When in doubt, get help from a financial advisor. The last thing you want to do is saddle yourself with an expensive debt burden in retirement, no matter how nice that new kitchen might look. Written by G. Brian Davis
Beyond the Basics: 10 Powerful Benefits of Reverse Mortgages You Didn’t Know About
Unlocking more than just cash and explore the unexpected advantages of reverse mortgages for a secure retirement What would retirement be like if you didn’t have to make a monthly loan payment? Imagine the financial freedom you could achieve if you no longer had to make a monthly mortgage payment. Reverse mortgages can be strategically utilized to manage and reduce debt obligations, enabling retirees to maintain financial stability and enhance their lifestyle. Understanding the Growing Debt Burden According to the Consumer Financial Protection Bureau, an increasing number of retirees carry mortgage debt into their retirement years. Some studies estimate that 50-68% of new retirees will have some form of loan payment, including home equity loans and lines of credit. For the mass-affluent baby boomer demographic, this percentage might be even higher. Consider the last social gathering you attended where you spoke with homeowners over the age of 55. How many of them had a mortgage, home equity loan or line of credit against their property? It’s likely that a significant portion of them did. In fact, it wouldn’t be surprising if the number was somewhere between 75-99%. This highlights the prevalent issue of mortgage debt among older homeowners, making the case for exploring debt management strategies such as reverse mortgages. For retirees aged 75 and older, housing expenses, including mortgages, property taxes, insurance, utilities and home maintenance, account for a substantial 43% of their monthly spending. With low savings rates, longer life expectancies and global uncertainty, eliminating a monthly mortgage payment and creating additional cash flow could be a considerable relief. Reverse Mortgages: A Brief Overview A reverse mortgage is a loan available to homeowners aged 62 or older, allowing them to convert a portion of their home’s value into tax-free dollars without giving up home ownership or title and without making monthly loan payments. The loan amount is based on the age of the youngest borrower, the home’s value and current interest rates. This is important: a reverse mortgage must be the first mortgage on the property, meaning any existing loans must be paid off with the reverse mortgage proceeds before the homeowner can access the remaining funds. Today, let’s consider the impact of eliminating a mandatory monthly mortgage payment. Case Study: Pierce and Linda Meet Pierce and Linda, a 65-year-old couple planning to retire at the end of the year. Here are their financial details: They are concerned about running out of savings or having to cut back on their lifestyle to make their savings last. While researching their retirement success rate, Pierce and Linda discovered that many financial advisors and online calculators suggest a safe initial withdrawal rate of around 4%, which for them would be $26,000 per year instead of $45,000. This realization was disappointing, but it prompted them to explore alternative options. Through further research, Pierce and Linda decided to consider a reverse mortgage to see if it could work for them. Although they are fully comfortable making their monthly payment, they want to explore all possibilities, especially if it could increase the amount of spending they could enjoy without jeopardizing their nest egg. During their research, they encountered two thought-provoking questions: These questions led them to consider a reverse mortgage as a viable option to enhance their retirement plan. The Reverse Mortgage Solution Based on their ages, home value and current interest rates, Pierce and Linda qualify for a reverse mortgage of $216,300. After paying off their $200,000 mortgage, they have a remaining line of credit of $16,300. Let’s explore 10 retirement-enhancing benefits of eliminating their mandatory monthly loan payment. 1. Extending Retirement Savings Years ago, my friend and mentor Ed Slott, CPA, asked me: “How much money does a client save when they use a reverse mortgage to eliminate their existing payments?” Initially, I thought the answer was obvious: in the case of Pierce and Linda, they would save $1,750 a month. “Not necessarily,” he replied. What he explained next was eye-opening. Eliminating a $1,750 monthly mortgage payment translates to significant savings for retirees like Pierce and Linda. With $650,000 in tax-deferred accounts like IRAs or 401(k)s, they would need to withdraw approximately $2,250 monthly (considering taxes) to net the $1,750 needed to cover their mortgage payment. By using a reverse mortgage to eliminate this payment, they retain around $27,000 annually in their savings ($2,250 x 12). This substantial retention can significantly extend the longevity of their retirement funds, ensuring greater financial stability throughout their retirement years. By leveraging a reverse mortgage to eliminate their monthly mortgage payments, Pierce and Linda can preserve their savings, potentially extending their retirement funds significantly, providing them with greater financial security and peace of mind. 2. Reducing Income Taxes By retaining nearly $27,000 in pre-tax dollars, Pierce and Linda not only lower their income taxes but also reduce their provisional income, which could prevent their Social Security benefits from being taxed. 3. Bridging the Budget Gap Initially, Pierce and Linda desired an annual withdrawal of $45,000 but considered a more conservative $26,000. The $19,000 difference can be bridged by the reverse mortgage. By eliminating their mortgage payment, they free up $27,000 per year in pretax dollars. Meaning they only need to withdraw around $18,000 from their retirement accounts in the first year. Looks like they can use the additional dollars per month to enhance their lifestyle, travel and enjoy the go-go years of retirement. In other words, they can have their cake and eat it too! 4. Supporting Grandchildren’s Education With the extra $1,750 per month saved from the reverse mortgage, Pierce and Linda could contribute to their grandchildren’s education. This money could provide a monthly tuition stipend, a gift or even a low-interest loan, offering significant financial support and creating a lasting legacy. The rising costs of higher education can be a burden on younger generations, and this contribution can make a meaningful impact on their grandchildren’s lives and futures. 5. Funding Life Insurance Policies The monthly savings can be directed toward purchasing cash value life insurance policies