Why Are ADU’s Popular for Extra Income?

Are you worried about your retirement income? Looking for ways to boost it? If you have heard about the popularity of ADU’s, did you know they can provide extra income as a rental unit on your property?  If you use funds from a reverse loan for its construction, it could be a superior solution for extra income each month and you would not be required to make a monthly payment on your reverse mortgage.

ADUs are secondary housing units that can be added to your existing property, providing you with a valuable source of rental income. Not only do they help address the affordable housing crisis, but they also offer a fantastic opportunity for homeowners to generate extra revenue during retirement.

But what about reverse loans? Reverse loans, also known as reverse mortgages, allow homeowners aged 55 for Jumbo Reverse Loans or aged 62 for the FHA HECM reverse loan or  older, to convert a portion of their home equity into cash. This can serve as a supplemental income source during retirement, enabling homeowners to access the value of their homes without having to sell or move.

With a reverse loan, the borrower continues to own their home and the Lender never takes possession of it.  The Title stays in the name of the borrower, just like on a traditional mortgage.

By combining these two options, you can unlock even more potential for increasing your retirement income.  There could be cash from a reverse loan to build an ADU or use the funds from it to increase monthly cash flow.

What are ADUs?

ADUs are accessory dwelling units that homeowners can add to their property, either as a separate unit to the main house or as a conversion of an existing structure. ADUs are also known as granny flats, backyard cottages, or in-law units. They can be used as a source of rental income, a place for aging parents or adult children to live, or even as a home office or studio.

ADUs are becoming increasingly popular as a means of addressing the affordable housing crisis and as a way for homeowners to generate extra income. They offer a way for homeowners to make the most of their property and take advantage of unused or underutilized space.

ADUs come in different shapes and sizes, depending on the local zoning laws and building regulations. They can be attached or detached to the main house and can range from a small studio apartment to a larger, multi-room unit.

Advantages of building an ADU for retirement income

Adding an ADU to your property can offer many advantages for generating retirement income. Here are some of the benefits of building an ADU:

ADUs can provide homeowners with a valuable source of rental income. By renting out an ADU, homeowners can generate extra income that can help supplement their retirement savings. Depending on the local rental market, an ADU can generate anywhere from a few hundred to a few thousand dollars per month.

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Reverse Loan; Fixed or Adjustable?

Reverse loans offer many choices to senior borrowers, but it can be confusing to decide which one to use because they are different from traditional mortgages, no mortgage payments are required and they are easier to qualify for on a fixed income.

And they also do not have a loan term.  Reverse loans are still a mortgage, but unlike what we are all accustomed to.   They are different, but similar in that both are liens against the subject property.

In the past when applying for a mortgage to buy a home or refinance, the most popular one was the Fixed rate, because you always knew what your mortgage payment would be, unlike an Adjustable Rate Loan where it can change and possibly increase over time.

And everyone always shops for the lowest interest rate, but that meant you had to pay more Points to get a low interest rate, but if you chose a higher rate the Points would decrease, or possibly be a “Zero” Point loan.

However, with a reverse loan, it is entirely different.   There are no Points, but an Origination fee and sometimes, there isn’t any fee at all.

The other difference is how the selected interest rate determines how much money you will receive from a reverse loan.  Sometimes the lower interest rates provide less money, and cost more, but if the loan is being used to pay off an existing mortgage and freeing up more cash flow, then that would be a consideration.

And then there is the question whether or not to chose a Fixed interest rate or the HECM Line-of-Credit.  is the borrower paying off a large mortgage?   Then the Fixed rate might be the best choice.

But if there is a small mortgage or none at all, then the HECM Line-of-Credit would be the preferable choice, as it will give the borrower more flexibility with their funds, plus it has a “growth” feature that will provide additional funds in the future.

Anyone reading this is most likely thinking, it’s confusing.   And it is.   And that is exactly why it is important to meet with a Reverse Loan Consultant who can provide you with a personalized proposal and eliminate some of the confusion.

In the midst of Covid-19 and the uncertainty of the future, more seniors are now actively investigating the benefits of a reverse mortgage and many have applied for their own loan to preserve their savings and have a financial “safety net”.

And maybe you should, too.


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