Finding the Right Options
When as a homeowner (or homeowners) you are over 62 and the home is either completely paid off or nearly paid off, you may think that a reverse mortgage is the ideal situation. Reversed mortgages allow up to five various options for using your equity. The three primary options for "cashing out" the equity of a home include:
A) Fixed line of credit – In this instance, the specific amount is paid for a specific number of months;
B) Equalized payments (called Tenure) – Set up a plan that pays a set amount of money on a monthly basis provided that one of the owners lives in the home;
C) Line of credit – You elect how much and when to draw funds from the amount that is loaned.
The benefits of a reverse mortgage include no payment of principal or interest, having immediate access to the equity in the home and in general, a lower rate of interest than a traditional mortgage. For homeowners, this may provide the best of both worlds, allowing them to use equity without requiring payments. However, there are specific cases where alternatives to reverse mortgages should be considered.
Comparing Cash Out Alternatives
Reverse mortgages provide some significant advantages; in particular, they do not have to be paid back until a home is sold by you or by your heirs. However, the alternatives to reverse mortgages may offer more benefits to the homeowner(s).
Life Insurance Policies – If you have life insurance policies that have cash value, you may be better off extracting the cash value from the policy. This option also helps protect the home's equity (which can still be used later) and the fees involved are generally lower;
Sell and downsize – Depending on the amount of equity that you currently have in your home, selling your home and moving to a smaller property is a good option. This allows the homeowner to pay for a new home with cash from the sale of the home and not have a mortgage to pay monthly. This may be helpful for those who wish to move to a more "senior centered" living arrangement such as an "over 50" community;
Refinancing your home – In some cases, since origination fees are lower on a traditional mortgage, the homeowner should consider refinancing the home. This is a good alternative if you have sufficient monthly income to maintain payments on a regular mortgage. Rates may also be lower than a reverse mortgage rate and may offer more flexibility. A home equity line of credit is another option worth exploring.
Additional options to a reverse mortgage include deferred payment loans and property tax deferrals. Deferred payment loans would work in some cases, similar to a standard mortgage, except that there would be a balloon payment due at the end of the note. Property tax deferrals are ideal if the reason you are considering a reverse mortgage is due to property tax burdens.
Risk Versus Reward
For some homeowners, the benefits of a reverse mortgage far outweigh the higher costs associated with them. In other cases, alternatives to reverse mortgages should be explored to make sure that the homeowners are getting the most out of their home. There are several caveats that are associated with a reverse mortgage and age, property value and health of the homeowners should always be considered. It is a good idea to contact a certified financial planner and find out what options are available to you before you agree to a reverse mortgage.
If the property is sold, the reverse mortgage amounts that have been withdrawn must be repaid as part of the sales finalization. For heirs, when the property owner dies, the reverse mortgage will need to be paid back when the property is sold. If the homeowner dies, the reverse mortgage payments will cease immediately. In the event that the home is jointly owned, the surviving homeowner may still continue to collect payments.
Sources and Image Credits
- AARP Top Reverse mortgage options https://www.aarp.org/money/credit-loans-debt/info-09-2010/pond-alternatives-to-reverse-mortgages.html
- HUD Reverse Mortgages https://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm