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If you are a homeowner at least 62 years old, you can use your home equity by taking out a reverse mortgage. This can be a good option if you are looking to supplement your income during retirement.
With a reverse mortgage, instead of monthly payments on the money received, the balance is paid when you move, sell your home, or die. But with eligibility criteria, high closing fees, and real estate planning implications, a reverse mortgage may not be the best solution for everyone.
Here’s what you need to know about reverse mortgages, as well as five alternatives to consider:
How a reverse mortgage works
BUT reverse mortgage this is a special type of loan in which you are engaged in under capital in your home and receive funds from the lender. There are several types of reverse mortgages, but Home Equity Conversion Mortgages (HECM) are the most common.
You will remain the owner of your home and use the proceeds to pay off the balance of your existing mortgage. With HECM, the rest of the funds can be used for just about anything from living expenses to debt consolidation, home care, home renovations, or an emergency fund.
The repayment is on hold until you sell the house or move out. If you die, your heirs can sell the house, reclaim the remainder, and keep excess funds for themselves.
Cons of a reverse mortgage
Reverse mortgages have drawbacks that, in certain situations, can make them unsuitable for homeowners.
- Reverse mortgages can have high upfront costs. Typically, you will have to pay the closing costs and fees associated with the loan, such as the mortgage insurance down payment.
- You will diminish equity in your home. A reverse mortgage allows you to borrow against your own capital, which reduces your capital and increases your debt.
- The lender can request the balance at an early stage. The balance will need to be returned if you do not maintain the home, fall behind in property taxes and homeowner insurance, choose another home as your primary residence, or die. If you are unable to repay the debt, the creditor may foreclose on the property.
- You can outlive your earnings. Depending on how you spend your reverse mortgage funds, you may run out of money.
- The heirs may not be able to keep the house. Your heirs may have options to keep your home after you die, but it could also cost them money.
5 alternatives to reverse mortgages
If you are put off by the disadvantages of a reverse mortgage loan, you have other options for using home equity.
1. Choose a private reverse mortgage.
Suitable for: Performing a reverse mortgage with no commissions and little risk of foreclosure
While HECMs are the most common type of reverse mortgage, you don’t have to go this route. One alternative is to create a private reverse mortgage loan, also known as an intra-family loan.
With this approach, your family members – usually your grown children – pay you regularly, and they get those contributions back when it comes time to sell the house.
This can affect your estate planning and tax situation, so consult a tax professional or lawyer in advance.
|May be cheaper than a traditional lender||May have implications for tax and estate planning|
|The house remains the property of your heirs||Your family may not be able or willing to fund the loan.|
2. Refinance your home
Suitable for: Transfer of your home to your heirs
If you already have a mortgage, you can exchange it for one that better suits your needs. FROM interest-term refinancing, you can lower the interest rate, change the loan term, or both. This can free up some money in your budget.
BUT cashing refinancing can also help you cover high costs because you take out a mortgage for more than your debt, pay back the principal on your old home loan, and keep the difference for yourself.
With both types refinancing, pay attention to the new loan term, as it may affect your retirement plan. Long term mortgages will keep you in debt for longer and may cost you more in interest. Consider refinancing for 10 or 15 years.
|Save some or all of the household property you have created over the years||Your heirs may have to pay off the balance of the mortgage after you die.|
|Pass the house on to your heirs||Refinancing with Cash Payout Lowers Your Capital|
3. Sell and reduce
Suitable for: Reducing overall costs without creating new debt
You can also sell your home if you need less space and want to cut back on your housing costs. Certain types of homes, such as condos or serviced homes, even charge you.
|Reduce housing costs||Selling a house and moving it comes at a cost|
|You will not take on new debt||You will have to adapt to a new lifestyle and less space|
4. Get a secured home equity loan.
Suitable for: Covering high costs
BUT equity loan this is the second mortgage that allows you to borrow money using your equity as collateral. The bank pays you a lump sum of money at once, which you will pay in equal installments over several years.
It can be a cheaper way to borrow cash compared to a reverse mortgage, credit card, or individual loan. Plus, you keep the house in the process.
|No age restrictions||Monthly payments can overwhelm your retirement funds|
|You can keep your home as long as you pay||The lender can revoke your foreclosure rights to your property if you are unable to repay the loan.|
5. Consider HELOC
Suitable for: Borrow money only when you need it
BUT equity line of credit – this is another type of second mortgage, but you get funds in a different way. You get access to a line of credit that you can borrow at any time during the draw period, paying only interest on what you borrowed.
At the end of the draw period, you will have several years to pay off the remaining balance. This can be a good safety net if you are short on urgent savings.
|Pay interest only on what you borrowed||The lender can revoke your foreclosure rights to your property if you are unable to repay the loan.|
|Usually has a lower interest rate than other types of loans, such as mortgage loans.||If the value of the house goes down, you can get back more than the house is worth.|