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#140: Using a reverse mortgage to reconfigure the residence


After months and months of dabbling with the idea of moving to a retirement community, the two of you, now in your mid-seventies, have decided to spend your remaining years in your own home. In the past, you’ve taken pride in being property maintenance do-it-yourselfers, but going forward, you’ll be willing to hire help as needed.

In fact, you are going to need contractor help executing some extensive renovations, primarily centered on adding a full master bedroom with walk-in closets and two full bathrooms to the ground floor. The cost for that work, which you estimate could be completed over half a year’s time, will be in the neighborhood of $85,000.

Your challenge is going to be finding the most efficient way to obtain that funding. In talks with your credit union, two different plans have been offered. Meanwhile, you’re assessing your own ability to cover a large portion of the costs.

Up until now, you’ve been supplementing pension and social security income with quarterly withdrawals from your joint investment account, and you are reluctant to further tap those sources, particularly in today’s uncertain market. Meanwhile, your largest single investment is stock you inherited from your grandfather years ago, then worth around $12,000; today, that stock is worth ten times that. Aside from the sentimental consideration (you had intended to leave those shares to your own grandchildren someday), in a sale, too much of the value would be lost in capital gains tax.

Instead of taking out a second mortgage on your home, you might consider accessing your housing wealth through a reverse mortgage, set up as a line of credit, which you would tap, paying for each stage of the remodel work as needed. As with any form of financing, there will be borrowing costs, but you’ll avoid the need to “upset” your systematic withdrawal plan, nor will you generate capital gains tax on the sale of stock. Yet another positive is that any unused portion of the equity will be credited with growth at the same rate as the interest being charged on the outstanding reverse mortgage loan balance.

With a reverse mortgage home equity line of credit, you’ll be able to comfortably “settle in” to your newly adapted and reconfigured residence.