Reverse mortgages can sound appealing to many retirees. Designed specifically for homeowners aged 62 or older, reverse mortgages, also called home equity conversion mortgages (HECM), allow homeowners to draw funds against their accumulated home equity. Unlike typical loans, there is no monthly payment, and the loan is deferred until the owner dies, ownership is transferred, or the owner chooses to move out of the home.
While some of the folksy ads on television might sound too good to be true, reverse mortgages can be right for some seniors who need to access funds to pay living expenses while they continue to live in their home. Home owners in their 70s and 80s who plan to stay in their home indefinitely, or those with few other assets are usually the best candidates.
As with any financial product, careful consideration is advised. The amount of money available in a reverse mortgage is determined by many factors, including the borrower’s age, current interest rates, and the value of the home. And these types of mortgages can be expensive, with origination fees as high as $6,000, and with other closing costs, service fees, and mortgage insurance premiums adding to the ultimate cost of the product. Interest continues to accrue for the life of the loan as well.
Seniors will need to maintain the home in good repair and stay current on insurance premiums and property taxes, or risk defaulting on the loan. Bankruptcy is also a violation of reverse mortgage agreements, and subjects the home to foreclosure. Another potential downfall is that if you spend too much of your equity early in retirement, you could come up short later if your living expenses are greater than your income.
Because of the high costs and the risk of losing those up-front fees if you ever have to repay the loan for any reason, it is wise to consider some of the following alternatives before committing to a reverse mortgage.
Refinancing an Existing Mortgage
If you have an existing mortgage on your home, refinancing that mortgage can be a viable option to lower monthly payments and free up some needed cash. Generally speaking, refinancing only makes sense if you are able to secure a lower interest rate on the new loan than the existing mortgage. Refinancing does involve closing costs, but these costs are generally lower than for a reverse mortgage. If you plan on staying in your home for the long term, refinancing can be an appealing option. And as a real benefit, the home remains an asset for you and your heirs, unlike the case in a reverse mortgage.
Securing a Home Equity Loan or Line of Credit
Home equity loans are another way to secure a lump sum payment that you can then pay back in fixed monthly installments over a specific period of time. As the name suggests, the amount you can secure is based on the available equity you have in your home, and the interest on the loan is generally set at a fixed rate.
A home equity line of credit gives you the right to borrow money based on the equity in your home (up to a certain limit), and you only pay interest on the amount you actually borrow, unlike a home equity loan. A line of credit can be a good option if you don’t need a large, lump sum immediately, but only plan to draw periodically on an as needed basis.
Both home equity loans and lines of credit typically feature low fees, and are easier and less expensive to secure than a reverse mortgage. And with both options, you retain your home as an asset for you and your heirs.
A REX Agreement is a fairly new financial product designed to allow homeowners access to the equity in their home. Offered by REX and Company, these agreements are designed for homeowners with single family detached homes and above average credit. Borrowers receive a cash payment of 12 to 17% of their home’s market value with the understanding that the lender will receive 50% of the increase in the house’s value when it is sold.
For example, when a house is valued at $500,000 and the borrower receives a lump sum of $50,000, if the house eventually sells for $550,000, the owner would then repay the original sum plus 50% of the appreciation, owing a sum of $75,000. Conversely, if the house depreciates, and sells for $450,000, the owner would pay back the original $50,000 loan minus 50% of the depreciation, owing a total of $25,000.
Much like a reverse mortgage, owners are required to live in their home for the duration of the agreement, so for seniors facing a move to assisted living or a skilled care facility, REX agreements are not a good option. Although a REX agreement is not considered a loan, there are closing costs, including flat fees for escrow, title and flood certification, and appraisal fees. Homeowners applying applying for a REX agreement will need to have at least 25% equity in their home.
Selling Your Home To Your Children
If you are already planning on leaving your home to your children, you may be able to sell it to them now to secure either a lump sum or monthly payments. There are many ways to structure a sale to your children, including a sales-leaseback agreement, in which you sell the house and then rent it back from them. Your children get rental income and can deduct depreciation, maintenance, and real estate taxes.
Another option is to set up a private reverse mortgage. Your children make monthly payments to you and they recoup their payments and interest when the house finally sells. Although there are some closing costs and legal fees with this kind of arrangement, it is typically less expensive than setting up a reverse mortgage through a bank, and your home stays in the family as an asset for you and your children.
Parents of children with high incomes can consider setting up a kind of REX agreement, in which they agree to pay their children a percentage of profits when the home sells in the future.
Renting Out Part of Your Home
If selling your home outright is not an appealing option, you may consider the possibility of renting out a part of your house to a child or other relative. While this is a great option for some, you should be realistic about how you will get along with family—some families require more space than others. If renting to family is not an option, consider renting to another senior. Lifestyles may be more compatible, and sharing expenses may be a real win-win situation.
Regardless of who your new tenant might be, make sure to have your new housemates purchase renters insurance, as they might not be covered by your homeowners insurance. And if you do rent to someone outside your family, be sure to do a credit and background check on your potential housemate.
Selling Your Portable Luxury Assets
Another option for securing needed cash that many people fail to consider is selling their portable luxury assets. Fine jewelry and watches tend to hold their value well, and selling them is an often overlooked option when faced with the financial challenges of retirement. Many times heirloom jewelry that hasn’t been worn in decades can be sold to companies like Diamond Estate Jewelry Buyers for a needed influx of cash.
If you would like to leverage the wealth stored in your jewelry box to finance your extended retirement, please contact Diamond Estate Jewelry Buyers today for a free consultation. You can also learn more at the following link: How to Sell Estate Jewelry.