If you're older and it's a stretch financially to stay in your home, a reverse mortgage may be tempting. But consider these cheaper, safer options first.
Reverse mortgages sometimes are a good option. Under the right circumstances, they might help an elderly person stay at home when retirement money is running out. But reverse mortgages are expensive, so they are not always the best choice for older homeowners.
A reverse mortgage lets you borrow based on the equity you have in your home. Instead of you paying the bank, the bank pays you, tax-free, with a series of payments that can include a partial lump sum of money, or through a line of credit.
Your loan amount is based on your equity amount, your age (you must be at least 62) and the best interest rate you can qualify for. You don’t need to make mortgage payments, and you can live in your home until you die.
With new government protections, reverse mortgages are less risky than in the past. But it still pays to be cautious, as they remain a favorite of scammers who target elders. A legitimate lender requires borrowers to receive counseling from one of these government-recommended nonprofit agencies before signing an FHA HECM (Home Equity Conversion Mortgage) reverse mortgage.
Despite the appeal, there are downsides to reverse mortgages, including:
- You can’t borrow against all of your equity. In general you can borrow more the older you are and the higher the value of your home, the Consumer Financial Protection Bureau explains. This National Reverse Mortgage Lenders Association’s calculator shows that the most a 92-year-old owner can borrow on a fully paid-for home worth $300,000 is about $216,000 — after paying nearly $9,000 in fees and mortgage insurance.
- You have to wait for some funds. To prevent abuse, the government limits borrowers to receiving just 60 percent of the loan proceeds in the first year.
- These loans are expensive. Interest rates can be higher than for a regular mortgage. The reverse mortgage calculator shows that the borrower above, for example, could pay 5.050 percent in interest on a fixed-rate reverse mortgage, although borrowers of conventional mortgages are paying about 3.5 percent, on average. Also, the fees are high — almost $9,000 plus the required mortgage insurance, which adds 1.25 percent monthly to the interest rate.
- The borrower can lose the home. If you don’t live in the home, fail to keep up the maintenance, don’t maintain insurance or fail to pay the property taxes, you may lose the home.
- Your heirs may be unable to inherit the home. Borrowers can stay in their homes until they move or die. When they leave, the loan balance and accumulated interest and fees must be repaid. “If you or your heirs can’t repay the loan, your home goes to the lender,” explains Money Talks News founder Stacy Johnson, in “Ask Stacy: How Do Reverse Mortgages Work?“
For these reasons, explore other avenues first. You’ll find 15 options below.
1. Sell and downsize
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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 than from a reverse mortgage.
- You can use the proceeds from the sale 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.
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Look into refinancing at today’s historically low interest rates, which might drop your monthly payment to a more manageable number. See if refinancing could get you a lower interest rate, lower fees and perhaps even some cash back.
- Fees are typically lower than with a reverse mortgage.
- Your heirs still may be able to inherit the property.
- Good news: It used to be difficult for retirees with substantial assets but limited monthly incomes to qualify for a mortgage, but after a rule change, you can count IRAs, 401(k)s, proceeds from the sale of a business and other assets in qualifying for conventional mortgages and refinancing.
- You must make monthly mortgage payments.
3. Home equity line of credit
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A home equity line of credit (HELOC) has a term — five to 15 years, usually. The first part of the term — 10 years, for instance — is your “draw” period, when you can pay only interest and no principal unless you wish to.
HELOCs are good options for:
- Seniors who want a safety net to cover unexpected expenses in the future.
- Homeowners at the very end of their lives, who can enjoy the low-cost draw period but likely avoid the increased payments later.
- Fees are lower than with a reverse mortgage.
- You may withdraw money in a chunk or as you need it.
- Lower interest rates than a reverse mortgage.
- During the draw period, you can choose to make lower interest-only payments or payments of principal and interest.
- Interest paid is tax-deductible.
- A line of credit can be cheaper than a home equity loan if you borrow a limited amount, repaying it quickly.
- You can access only a limited amount of equity. Your loan size is based on your equity and credit profile.
- When the draw period is up, your low interest-only payments end and payments increase. If you miss payments, you risk foreclosure.
- Interest rates are variable, meaning that payments can grow or shrink as mortgage rates change (mostly likely they’ll grow as rates already are near all-time lows).
- There’s a risk: Lenders can close a HELOC and require you to pay it off — for example if your income or home’s value fall, HouseLogic says.
4. Get a home equity loan
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A home equity loan, like a reverse mortgage or a home equity line of credit, lets you access some of your equity. You get a lump sum. Unlike a reverse mortgage, you repay it in fixed monthly installments over a contracted period of time. Home equity loans can have a fixed or adjustable interest rate.
- Your home stays in your family as long as you continue repaying your loan.
- Interest paid is tax-deductible.
- You can get a home equity loan with a fixed (stable) interest rate.
- Fees are lower than with a reverse mortgage.
The downsides are similar to a HELOC, including:
- If you fail to make monthly payments you could lose your home to foreclosure.
- You can access only a limited amount of home equity.
- Monthly payments of principal and interest are required.
- If you choose an adjustable interest rate loan, your payments can grow.
5. Sell the home to family or friends
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See if loved ones will buy your home, perhaps at a lower-than-market price, allowing you to stay there and live on money from their payments. There are many ways to do this. HouseLogic describes how to structure such agreements. Examples include:
- Sell a portion of the home — 49 percent, for example — for a lump sum or set up a mortgage with monthly payments to you.
- One older man I knew sold his home to friends with the understanding he could stay on as long as he wished in an older portion of the house. The buyers built a new structure for themselves next to it.
- You can stay in your home.
- The arrangement may help someone you love to buy a home in today’s very tight market.
- Depending on market conditions, your buyer may receive a return on the investment.
- Borrowing money from relatives can trigger family tensions and disputes. Get an attorney’s advice on how to transfer the title and use a formal, binding contract.
- Your family or friends will need sufficient income to purchase the property.
6. Rent to vacationers
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Happily for cash-strapped retirees, the sharing economy has appeared just in time to add cash to meager retirement incomes. As The New York Times reports, Airbnb estimates that 260,000 or its 2 million listings are offered by people who are 60 and older.
- The income can be enough to help you stay in the house, or at least to postpone the time when you can enjoy it before you must sell.
- If you have more space than you need anyway, it’s a way to put it to use.
- You get to continue living in your home.
- You must share your home with strangers — not a happy prospect for everybody.
7. Take in a monthly renter
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Renting a portion of your home on a monthly basis may deliver enough income to let you keep your 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.
- Rents are rising rapidly across much of the United States. If your mortgage payment is low, you might even be able to pay your mortgage from rental income.
- 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.
8. Apply for weatherization assistance
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Even just delaying getting a reverse mortgage helps by letting you to borrow the larger sum available when you are older. Do what you can to put off the decision for a while.
For instance, make your home more affordable to live in. States — through the federal government — offer weatherization programs that allow people with low incomes to stay in their homes through loans, energy improvements and lower utility bills. States often give preference to people over 60, according to the U.S. Department of Energy.
Contact your local Area Agency on Aging (type in your city, state and ZIP code) to learn where to apply or ask your electric or heating fuel utility provider.
9. Apply for property tax relief
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Many counties and states provide property tax discounts for seniors who meet low-income guidelines. 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 that give them a partial tax credit.
10. Tap insurance
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Borrow from a whole or universal life policy.
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Get a full- or part-time job to improve your financial situation.
12. Take a 401(k) loan or distribution
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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 reverse mortgage counselor with the Department of Housing and Urban Development (HUD) to see if this is your best choice.
13. Apply for Medicaid
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These state-run programs help people with low incomes and assets pay for some home health services 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.
14. Check VA benefits
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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.
15. Check the availability of other benefits
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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.
If you are still considering a reverse mortgage, get help understanding your choices before you make a move: Talk with a HUD reverse mortgage counselor. The fee is low — or 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 the HUD website (or call 800-569-4287) and through the National Council on Aging (855-899-3778).
Are you thinking of getting a reverse mortgage? Have you already got one? Share your experience in the comments below or on our Facebook page.