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Reverse mortgages can be useful in some circumstances, especially if it would allow you to stay in your home and not move.
But they are expensive and may not be the best choice for older homeowners looking for solutions to money problems.
A reverse mortgage lets you borrow based on the equity in your home. You must be at least 62. Instead of you paying the bank, the bank pays you, tax-free, in a lump sum, a series of payments or a line of credit. Your loan amount is based on your equity amount and your age. You make no mortgage payments and can live in the home until you die.
So far so good. But there are downsides. Money Talks News finance expert Stacy Johnson covers some of them in this video, as well as alternatives to reverse mortgages to solve money problems in your senior years. Watch the video, then read on for more details.
- You can’t borrow all of your equity. This calculator from the National Reverse Mortgage Lenders Association shows that a 92-year-old owner of a fully paid for home worth $300,000 can borrow just $192,600 — almost $9,000 of which would go immediately to fees and mortgage insurance. The loan balance would grow over time as unpaid interest adds up. (The Consumer Financial Protection Bureau explains how loan amounts are decided.)
- You’ll probably get more by selling. The owner of the $300,000 home might, for example, receive about $270,000 or $280,000 after paying Realtor commissions, fees, taxes and the cost of cosmetic repairs to prepare the home for sale.
- Reverse mortgages are expensive. Fees are high — over $16,000 (about half of it for mortgage insurance) in the case of one younger borrower vs. about $3,500 in fees to refinance the same home. Also, “interest rates can be steeper than traditional loans — current rates are between 4 and 12 percent,” says a CNBC columnist.
- You can lose the home if you move out, fail to keep up the maintenance, or don’t pay insurance or property taxes.
- Your heirs may not be able to inherit the property. When you move or die, you or they must repay the bank for the borrowed money plus accumulated interest and fees. Otherwise the bank gets the home.
You have options
For these reasons, do yourself a favor by exploring other avenues first. You’ll find 14 options below. This AARP brochure has more, plus detailed information on costs, and the National Council on Aging’s home equity adviser describes options for tapping home equity.
Get help weighing your options from a HUD reverse mortgage counselor. The fee is low, or it’s free if your income is low. Counseling is required to get a reverse mortgage, but you can get counseling without applying for the loan. Find counselors at this HUD site and through the National Council on Aging (call 855-899-3778).
1. Sell and downsize
It’s hard to let go of your home, but selling may give you more freedom. It’s at least worth exploring.
- If you have equity in the home, you’ll probably get more of it from selling the property than from a reverse mortgage.
- You can use the sale proceeds to buy or rent a more affordable home or move in with relatives.
- Your home is no longer yours.
- You can’t bequeath it to heirs.
Refinancing at today’s low interest rates could drop your home loan payment to a more manageable number.
- Fees are typically lower than with a reverse mortgage.
- Your heirs still may be able to inherit your property.
- Good news: It used to be difficult for retirees who had substantial assets but limited monthly incomes to qualify for a mortgage. But last year Freddie Mac changed its rules. Now IRAs, 401(k)s, proceeds from the sale of a business and other assets can be counted in qualifying for conventional mortgages and refinances. “Fannie Mae, the other big mortgage investor, has a similar option for seniors,” says The Washington Post.
- Unlike with a reverse mortgage, you must make monthly payments to pay back the mortgage.
3. Get a line of credit
A home equity line of credit might be your solution. It has a term — 15 or 20 years, for example — and the first part of the term — 10 years, for example — is your “draw” period, when you can pay only interest and not principal if you wish.
HouseLogic says HELOCs are good options for:
- Seniors who like a safety net for covering unexpected expenses in the future.
- Older homeowners who don’t expect to live longer than 10 years, so they can enjoy the draw period but avoid the monthly payments later.
- You can preserve your home for you and your heirs.
- Fees are lower than with a reverse mortgage.
- You can withdraw money in a chunk or as you need it.
- You can borrow at today’s low interest rates and receive some of your home equity.
- During the draw period, you can pay only the monthly interest or make payments of principal and interest.
- As with a reverse mortgage, the amount of equity available to you in a home equity line of credit is limited. The bank sets your loan size based on your equity and your credit profile.
- When your draw period is up, your interest-only option ends and you must make larger, regular payments including principal and interest, or repay the loan perhaps by selling the home. If not, you could lose it to foreclosure.
- Interest rates are variable, meaning that your rate can increase or decrease. It’s not likely to decrease, however, because mortgage rates now are near all-time lows.
- There’s a risk: “The lender can shut down your HELOC if your income or home value fall,” HouseLogic says.
4. Get a home equity loan
A home equity loan gives you a lump-sum payment that you repay in fixed monthly installments over a set period of time. Most home equity loans have a fixed interest rate.
- Reliable fixed interest rate.
- Lower fees than a reverse mortgage.
- You can access only a limited amount of home equity.
- Monthly payments of principal and interest are required.
5. Sell to your kids
Depending on family relations, selling to grown children may be worth exploring.
- The home stays in your family.
- Depending on whether property values are rising, your children may receive a return on their investment.
- Borrowing money from relatives can be a minefield, triggering family tensions and disputes. Get an attorney’s advice on how to transfer the title and use a formal, binding contract as you would with anyone else.
- Your children need sufficient income to purchase the property.
6. Rent out a room
Renting a portion of your home may give you a stream of income that lets you keep your home. In years past, older homeowners often took in boarders or rented out rooms to share the overhead on a home. Make certain to carefully screen candidates. Get help from a trusted friend if you’re not sure how to do this.
- Seniors, especially singles, may enjoy the companionship.
- Rent prices are increasing across much of the U.S. If your mortgage payment is low, you might even be able to pay your mortgage from rent.
- Loss of some privacy.
- Loss of total control over your home.
- You’ll need a degree of savvy to screen candidates for safety and manage financial and social transactions.
7. Tap insurance
Borrow from a whole or universal life policy.
Get a full- or part-time job.
9. Take a 401(k) loan or distribution
Perhaps you’re still working and not yet drawing on retirement funds. Look into taking a distribution from your 401(k) plan (no penalty after age 59½) or borrow from it if your plan allows. It’s risky to raid your retirement savings, however, so first talk with a HUD reverse mortgage counselor to see if this is your best choice.
10. Apply for Medicaid
This state-run program helps people with low incomes pay for some medical services, including hospice and possibly nursing home care or residence in an assisted living facility. Learn about eligibility, or apply at Healthcare.gov by choosing your state at the bottom of the page.
11. Check VA benefits
Veterans or their widowed spouses may be eligible for the U.S. Department of Veterans Affairs Aid & Attendance benefits. Housebound senior vets or their surviving spouses receive care at home or in a nursing home or assisted living facility. The VA also has programs for disability compensation, education and training, pensions, mortgages, health care, vocational rehabilitation, employment and insurance.
12. Access help for seniors with home repairs, modifications and weatherization
Answers.USA.Gov has contact information for local, state and federal programs that help low-income seniors pay for energy-efficient upgrades and repairs that keep you in your home.
13. Seek property tax relief
Call your county assessor’s office to learn of any state or county programs that exempt low-income seniors from property tax payments, that let them postpone paying property taxes, or give them a partial tax credit.
14. Check availability of other benefits
Use BenefitsCheckUp, a free service of the National Council on Aging, to learn if you are eligible for other benefits, including help with food, medications, utilities, health care, legal services, in-home services, employment training, housing, taxes and transportation.
Are you thinking of getting a reverse mortgage? Have you already got one? Share your experience in the comments area below or at our Money Talks News Facebook page.