Reverse Mortgage Alternate options: 5 Choices for Seniors
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If you are a homeowner who is 62 or over, you may be able to use the equity in your home by taking out a reverse mortgage. This can be a good option if you want to supplement your income in retirement.
With a reverse mortgage, the balance is due when you move, sell the home, or die instead of making monthly payments for the money received. But with eligibility criteria, high closing fees, and estate planning ramifications, reverse mortgages may not be the best solution for everyone.
Here’s what you need to know about reverse mortgages, along with five alternatives for you to consider:
This is how reverse mortgages work
A reverse mortgage is a special type of loan where you borrow against the equity in your home and receive funds from the lender. There are different types of reverse mortgages, but Home Equity Conversion Mortgages (HECMs) are the most common.
You remain the owner of your home and use the proceeds to pay the balance on your existing mortgage. With an HECM, the rest of the funds can be used for almost anything from the cost of living to debt consolidation, home care, home improvement to an emergency fund.
The repayment is deferred until you sell or move out the house. If you die, your heirs will sell the house, pay back the balance, and keep any excess funds.
To qualify for a reverse mortgage, you – and the home – must meet the eligibility criteria. The lender checks whether:
- You are at least 62 years old.
- You either own the house directly or have low credit. The requirements vary with each lender.
- You take part in a consultation with an agency approved by the Office for Housing and Urban Development.
- You or your spouse live in the apartment as your main residence.
- The house is in good condition.
You must also continue to cover all property tax payments, home insurance premiums, and other household maintenance costs while you live in the house.
Disadvantages of a reverse mortgage
Reverse mortgages have drawbacks that can make them unsuitable for homeowners in certain situations.
- The reverse mortgage can have high upfront costs. You will usually have to pay closing costs and fees related to the loan, such as: B. an initial mortgage insurance premium.
- You are reducing the equity in your home. A reverse mortgage allows you to borrow against your home equity, which decreases your equity and increases your debt.
- The lender can demand the remaining amount early. The remaining amount must be repaid if you fail to maintain the house, fall behind with property tax and household insurance, set up another house as your main residence, or die. If you can’t repay, the lender can lock up the property.
- You can outlive your proceeds. Depending on how you spend the reverse mortgage funds, you may run out of money.
- Heirs may not be able to keep the house. Your heirs may have ways to keep your home after you die, but it can also cost them money.
5 Alternatives To A Reverse Mortgage
If the disadvantages of reverse mortgages put you off, you have other options for developing home equity.
1. Opt for a private reverse mortgage
Best For: No fee and low risk of foreclosure reverse mortgages
While HECMs are the most common type of reverse mortgage, you don’t have to go that route. An alternative is to set up a private reverse mortgage, also known as an intra-family loan.
With this approach, your family members – usually your adult children – make regular payments to you, and they get those contributions back when it is time to sell the house.
This can affect your estate planning and tax situation, so speak to a tax specialist or attorney beforehand.
|Can be cheaper than a traditional lender||May have tax and inheritance consequences|
|The house remains an asset to your heirs||Your family may not be able or willing to finance the loan|
2. Refinance your home
Best Suited For: Handing over your home to your heirs
If you have an existing mortgage, you may be able to exchange the loan for a loan that better suits your needs. With interest and term refinancing, you can lower the interest rate, change the loan term, or both. This can free up some cash in your budget.
A payoff refinance can also help you cover a huge expense as you take out a mortgage for more than you owe, pay off the principal on your old home loan, and keep the difference.
Pay attention to the new loan term for both types of refinancing, as this can affect your retirement savings. A longer term mortgage will keep you in debt longer and may cost you more interest. Consider refinancing with a loan term of 10 or 15 years.
|Keep some or all of the home equity you’ve built over the years||Your heirs will likely have to pay the mortgage balance after your death|
|Pass the house on to your heirs||Cash-out refinancing reduces your equity|
3. Sell and downsize
Best For: Reducing Your Overall Spend Without New Borrowing
You can also sell your home if you need less space and want to reduce your housing costs. Some types of homes, such as condos or assisted living facilities, even do the maintenance for you.
Seniors can also qualify for utility financial assistance, home repairs, and property taxes through state and local government programs or the Administration for Community Living.
|Reduce your housing costs||Selling a house and moving are associated with costs|
|You will not take on any new debt||You have to adjust to a new lifestyle and less space|
4. Get a home loan
Best For: Covering Large Expenses
A home equity loan is a second mortgage that allows you to borrow money using your home equity as collateral. The bank gives you a lump sum in advance, which you repay in equal installments over a number of years.
This could be a cheaper way to borrow cash compared to a reverse mortgage, credit card, or personal loan. Plus, keep the house with you.
|There are no age restrictions||The monthly payments could put a strain on your retirement savings|
|You can keep your home as long as you make payments||The lender can lock up your property if you cannot repay the loan|
Check Out: Should You Get A Debt Consolidation Home Loan?
5. Consider a HELOC
Best For: Borrowing Money Only When You Need It
A home equity line of credit is a different type of second mortgage, but you get the funds in a different way. You get access to a line of credit that you can borrow at any time during the draw and only pay interest on what you borrow.
After the draw period has expired, you have several years to repay the remaining balance. This could be a good safety net if you don’t have emergency savings.
|Only pay interest on what you borrow||The lender can lock up your property if you cannot repay the loan|
|Usually has a lower interest rate than other types of loans, such as loans||If the value of your home goes down, you could pay back more than the home is worth|
About the author
Kim Porter is an expert on credit, mortgage, student loan and debt management. It has been featured in US News & World Report, Reviewed.com, Bankrate, Credit Karma, and others.
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