In spite of the fact that market penetration for the reverse mortgage product category is significantly lower than it is on the traditional forward mortgage side, a reverse mortgage seems to at least be associated with the act of extracting and converting a senior’s home equity into cash. Because of that association, some people may not be aware of potential alternative options to reverse mortgages according to a column published at Forbes this week.
“If you’re 62 or older and your home equity is your biggest asset, a reverse mortgage might be right for you,” the column notes. “You also need to own your home mortgage-free or be close to paying it off. Ideally, you’re planning to live in your home indefinitely, so it should be one that can accommodate aging, perhaps with some minor modifications. It’s also possible to use a reverse mortgage to purchase a different home, however.”
Nevertheless, some alternatives to a reverse mortgage that seniors can potentially explore are boiled down to four key alternatives, according to Forbes. The first is simply selling the home, and accessing its equity via the sale.
“By selling your home, you will unlock 100% of your equity,” the article notes. “You may not walk away from the transaction with the full amount: most people will pay a real estate agent’s commission and spend some money fixing the home up to maximize the sale price.”
This option may also not be ideal for someone who is eager to remain in their home, since selling the home obviously requires moving out of it. For those who want to remain in their home, refinancing an existing forward mortgage is the second potential cited alternative, since a better interest rate could potentially help to lower the homeowner’s traditional mortgage payment.
“You might choose a cash-out refi over a rate-and-term refi if you need a lump sum now but will have reliable cash flow to make monthly mortgage payments going forward,” the column notes. “You might also choose it if interest rates are low. With either type of refinance, you will pay closing costs that usually total 1% to 4% of the loan amount. Plus, you’ll pay interest on the mortgage. Overall, the costs may be similar to moving, but you won’t have to move.”
Income and credit score requirements could serve as major roadblocks, however, according to the column. The third and fourth options are either a home equity line of credit (HELOC) or a home equity loan, respectively. However, a HELOC does require a payment on any money drawn which may cause payments to increase over time, and a home equity loan also requires monthly payments. A reverse mortgage requires no direct monthly payments related to the loan balance.
“If you need more cash in retirement, taking out a reverse mortgage could help you gain access to your home’s equity,” the column notes. “But this type of loan isn’t right for everyone, especially if you’re a relatively young retiree. Consider all of the options available to you to unlock your home’s equity before deciding.”
Read the column at Forbes.