How you view your home changes as you pass through life: from a first apartment with roommates to a house in a great school district when you start a family.
When your children are grown or you take retirement, you might begin to look at your home in another way: cash cow. Adding an in-law apartment or similar dwelling to your property can pay off.
By adding a secondary residence to your property, you can create a potential stream of rental income--or consolidate expenses by sharing your home with parents, children and/or grandchildren.
This investment can increase the value of a property by as much as a third, and it can bring more personal benefits.
"Three-quarters of our clients use their second unit to bring their loved ones closer while still enjoying the privacy of their own private home," says New Avenue's Kevin Casey. This Northern California company helps people renovate their homes to add an accessory dwelling--such as the in-law apartment, a stand-alone cottage or "casita," or a finished garage.
One of Casey's clients, for example, wanted to be closer to her grandchildren. She designed a casita with a large gourmet kitchen and a fireplace, and then she gave her main house to her daughter. Now she has much more time with her grandchildren--and she also has her own place to read, entertain and to close the doors and travel whenever she wants.
In addition, the rise of rental-by-owner services such as Airbnb and VRBO.com have made it possible for anyone to rent out extra space on their property, so the in-law apartment doesn't even need to be for the in-laws, per se--it can be an extra stream of income.
Financing an in-law apartment is often done through a credit union or local bank, using the equity in their primary residence. For homeowners with sufficient equity and a good credit rating, there are a few different home-equity loan options to choose from, depending on your circumstances. In each case, the equity in the home serves as collateral to secure the loan.
Closed-End Home Equity Loans
What is traditionally is called a home-equity loan is a "closed-end" home-equity loan. Such a loan is for a specific amount the borrowers receive in a lump sum. This makes a closed-end equity loan suitable for financing large expenditures.
Like the primary mortgage on a house, closed-end home-equity loans can be given at fixed- or variable-interest rates. Equity loans, however, typically have shorter maturities than the primary mortgage on a home. That means you need to make plans to pay off the loan or refinance it in the near future.
In addition, the required monthly payments to the lender may affect cash flow.
Home Equity Lines of Credit
A second type of home-equity loan is home-equity line of credit (HELOC). With a HELOC, the lender sets an amount a borrower can access when he or she chooses. The borrower might or might not use the full amount. This is much like a credit card account with a set limit. However, unlike credit card debt, interest on a HELOC is tax deductible in most cases.
What if you want to tap the equity of your home without facing additional monthly loan payments?
For a homeowner who is 62 or older, with sufficient equity in their house, a home-equity conversion mortgage--also known as a reverse mortgage--could be a good option. As with the other types of equity loans, the amount you can borrow with a reverse mortgage will depend on the amount of equity you have in your home.
Although no payments are due to the lender as long as you live in the home, the loan has to be repaid if you die or move out of the house. That typically means selling the house. The good news is the amount owed can't be more than the value of the property.
You need to take care in selecting a lender for your in-law apartment.
Unscrupulous practices by some lenders in the past led to federal requirements to protect the elderly. The U.S. Department of Housing and Urban Development (HUD) requires anyone 62 or over who qualifies for a home mortgage get counseling from an approved counselor. It has designated several agencies to provide this counseling. You can search the HUD website for a counselor near you.
The National Council on Aging (NCOA) "is the only national aging organization that is approved by HUD to offer reverse mortgage counseling," said Amy Ford, its director of home equity initiatives. Consumers can connect with an NCOA counselor by calling (855) 899-3778 toll-free.
NCOA also provides a helpful pamphlet on reverse mortgages, "Use Your Home to Stay at Home".