How Retirees Finance An ADU

A retired person living on a fixed income can use a reverse mortgage to finance an ADU. It can increase their monthly disposable income by thousands of dollars for the remainder of their life! And, with just a little bit of attention, the loan amount will remain exactly the same for as long as they live.

Before I dive into how that might work I want to address the elephant in the room. You might think using a reverse mortgage for an ADU is a bad deal targeting feeble minded seniors. I know I certainly thought that way.

I was wrong and, respectfully, you might be as well. Is it crazy to hope you will hear me out? There is no direct profit for me (on the loan) and it could make all the difference for a retired senior.

I Grilled A Reverse Mortgage Specialist

I interviewed Janice Cohen, I reverse mortgage specialist with Mutual of Omaha. (A huge company with a lot to lose if they were cheating people). She helped me understand how it is safe to use a reverse mortgage to finance an ADU. Take a listen if you like that sort of thing- you can hear me ask tough questions with a lot of skepticism. For those who like to skim, the rest of the article draws out the important points.

Why A Senior Wants A Backyard Dwelling (ADU)

ADUs are perfect for a senior who wants to age in place with a companion or pay for home health care with the rental income from the ADU.

Some seniors might even move into the brand new ,one level Backyard Home (ADU) and rent out the main house for additional income.

(Get your Free Consultation to make your ADU easy, faster and more convenient)

A Reverse Mortgage Update

I asked Janice Cohen- “Reverse Mortgages have a terrible reputation, so tell me why they are now a safe, legitimate financial instrument? What has changed?”

Janice’s answer – “In 2015 there was the Reverse Mortgage Enhancement Act. It modified several different aspects of the RM. There are three important changes or “enhancements” in this bill.

The first way was simple – we got a LOT more conservative with our loan amounts. Simply put, we lend a lot less of the home’s value, relative to the borrowers age at time we fund the loan, then we did in the “before times”. This means it is a lot

Secondly, and this is going to sound obvious, we examine the borrowers financial history. We check to see they have enough income to pay for property taxes, utilities, food, basic living expenses, etc. We also check payment history.

Third – the spouse has lifetime rights to occupy the home. The bank can’t “kick out Mom” after Dad passes away. (or, of course, the other way around. A reverse mortgage has always been a “no recourse” loan. Put these together and it means the surviving spouse will never have to move and the heirs won’t inherit any mortgage debt. Even if the house isn’t worth enough to pay it off.

Todays retirees are using reverse mortgages to finance their ADUs and so much more!”

Reverse Mortgage Mistakes

Where is the catch? Compound interest- which is only a mistake of you are not aware. If you completely ignore your reverse mortgage the interest gets added to your loan amount – it compounds. The loan amount grows and so does the interest payment. This can all be avoided by paying the interest on the loan every year.

But, there are a LOT of reasons to allow this the interest to compound. For example, if your loan amount is low or your age is high, paying the interest might be more trouble than it is worth.

Another mistake is getting an Equity Share Loan. I not even sure if this a sanctioned reverse mortgage product but it is straight up evil. This is a lender who gives the senior a lump sum now in exchange for part ownership of the home.

Reverse Mortgage Financing For ADU (Case Study Example)

Let’s use a case study to understand how this works.

Say you home is worth $1,500,000 and you have $450,000 left on your mortgage. Just for grins, let’s say your monthly principle and interest payment is $1,000.

You want $350,000 to build and furnish an ADU.

You get a reverse mortgage for a total of $750,000, pay off your existing mortgage, and build your Backyard Home. Because this is a reverse mortgage there are NO MONTHLY PAYMENTS.

Combine the $1,000/ mo you no longer pay on your old mortgage with the $2,400 rent from the ADU for a total of $3,400 in increased monthly income.

Avoid mistake #1 and pay the interest charges each month and use the rest to pay for anything you want. Or, “let it ride” and spend it all. It’s your choice.

And, over time, you will get more rent for the ADU, increasing your disposable income!

(Ready to get your own ADU? Reach out to ADU DIGGS to get started!)

Who Can Get A Reverse Mortgage?

The bank is betting that the equity in your home lasts longer than you do. This means a bank will lend more of a home’s equity to an older person and charge a lower interest rate. In this case it pays to be older.

Significant monthly income is not required, but they will require you have enough income to pay basic living expenses and demonstrate a history of paying bills.

The qualifying age for a reverse mortgage is 55 and up.

Reverse Mortgage vs Home Equity Loan For ADU Financing

You are familiar with a home equity line of credit (HELOC). Interest rates and terms are easily available and we all know how it works.

A reverse mortgage has significant advantages.

The homeowner only needs enough income to cover basic living and property expenses.
The homeowner (and spouse) will never lose their home.
The heirs will not inherit any debt from the mortgage.
There are no payments for the reverse mortgage ADU financing. You can chose to rent and spend the money or use the ADU to house a companion or health care worker.

In contrast, a HELOC requires significant monthly income, regular monthly payments, and has severe penalties for you or your heirs if the payments or loan is not paid off.

A Guide To Reverse Mortgage For Older Adults

You may like what you read, but continue to feel uneasy. Makes sense.

The National Council on Aging is a non-profit organization that advocates and educates older adults. They wrote a great booklet, “Use Your Home To Stay At Home”. You can get a copy of that booklet by clicking HERE.

For the easiest (and waaay more personal) option, call Janice Cohen of Mutual of Omaha NMLS #414191. She is at 888-740-9573. She is patient, kind, and ridiculously knowledgeable. She is a great choice to find out how to finance your ADU with a reverse mortgage.

Ready to chat with us about YOUR Backyard Dwelling (ADU)? Get started by clicking here.