I'm at 65 and would like to repair my home. The approx cost of repairs is $75000 and I'm yet to pay for $255,000 of home equity loan balance. Should I refinance with an interest-only loan for low payments or get a reverse mortgage or do you think I`ll be better off with using my IRA money and then pay tax on how much I withdraw.
Solution:
If you're looking to generate cash flow for the next 10-20 years, then I suggest that you go for a cash-out refinance with a reverse mortgage loan. You don't have to make monthly payments on your reverse mortgage. Instead, you pay it off in a lump sum amount only when the loan period ends.
However, within the repayment period, if you sell off the property or move out, you'll have to pay back the loan with accrued interest. And if you pass away your heirs can pay it off and inherit the property. Otherwise, they’ll lose the property to the lender.
As far as rates are concerned, reverse mortgage may not be as good as conventional refinance loans. Also, at the age of 65 years, it needs to be seen as to how much you can borrow. The older you are, the more cash you can take out through a reverse loan. If the loan amount isn't enough to cover your equity loan balance and the repairs, it isn't a good decision to refinance with a reverse mortgage. Moreover, you should have around 50% equity in the home if you`d like to get a reverse loan. The higher your equity, the better!
However, if there isn`t enough equity and you don`t get the amount you`re looking for, it`s better to refinance with a 30 year fixed rate loan at a rate lower than that of your equity loan. The best is to choose an amortized plan instead of an interest-only. This is because for the initial years of the interest-only loan, you don`t need to pay anything towards the principal, though you may if you`d like to. So, after a few years, you`ll have to follow the amortized plan and the monthly payments will be higher compared to what you pay now as because the principal payments will be involved. And considering your age, you never know whether it will be easier to pay.
As for withdrawing from your IRA, it`s worth giving a thought if you`re not getting reverse mortgage. Most IRAs would allow you to withdraw without penalty after you`re 59 and ½, though you need to pay taxes upon withdrawal. So, have a talk with your tax advisor and get an estimate of the taxes you need to pay. If you think it`s worth payable, better take out IRA money in case you`re not comfortable with a conventional 30 year fixed. Though it`s like taking out retirement money but if you have enough savings and other retirement plans like 401k etc, then taking out IRA money seems good enough as opposed to taking in more debt at this age by refinancing.
