Older adults often think their best option to tap into their home’s equity is to take a reverse mortgage. While the idea sounds great, there are many downsides to the program. Sure, you could take money out of your home and not owe a penny until you move or die, but there are many fees involved with the program. Not only will you pay high origination fees, there are also service charges and closing costs. Plus, don’t forget about the accruing interest. When it’s all said and done, you lose a lot of money to fees and interest.
Rather than using this option as a first choice, look at the other options available to you. While you might not want to think about having a mortgage payment at the age of 70, it may be the better option for you and your beneficiaries in the end.
Take a Cash-Out Refinance
If you own the home free and clear, you can still refinance the house. You can take out a cash-out refinance. This means you tap into your home’s equity. You receive a lump sum of cash in hand and make regular monthly payments on the amount.
Before you do this, you’d want to make sure you could afford the monthly payments. Make sure you ask the lender the exact cost of the monthly payment that includes principal and interest. If you take out less than 80% of the home’s value, you won’t have to worry about mortgage insurance. Of course, you’ll still have to keep up with your real estate taxes and homeowner’s insurance payments too.
The lure of the cash-out refinance versus the reverse mortgage is the lower fees. Yes, you’ll pay closing fees, but they are standard fees. Plus, you don’t have to pay origination fees. If a lender charges you points to get the loan, shop around. You have many options when searching for a home loan, especially if you have 100% equity in the home.
Take Out a Home Equity Loan/Line of Credit
Do you want an ‘emergency account’ for those times when you run out of cash? A home equity line of credit can be a good option. This works like a credit card except your home is the collateral in this case.
The lender approves you for a specific credit line, which sits in an account. You don’t have to draw any funds if you don’t need them. If you don’t draw anything out, you don’t have to make any payments. When you do draw funds, you pay interest only for the first 10 years. After 10 years, you cannot draw the funds any longer. You then begin paying principal and interest payments for the remaining 20 years of the term.
The HELOC also has lower fees than the reverse mortgage in most cases. Plus, you are in charge of how much money you draw out and what you owe. If you don’t end up needing the funds, let them sit. At least you have the peace of mind that they are there should you run into financial trouble.
Tap Other Resources
Look around and see what other resources you have at your disposal. A few good examples include:
- Life insurance policies that have a cash value
- Real estate investments
- Stock and bond market investments
Think of the investments you have made through the years to help you with your golden years. You might want to consider tapping into them before taking out a reverse mortgage. Of course, you should talk with your tax advisor to see how tapping into these resources could affect your tax liability, but chances are it will be a lesser impact than the reverse mortgage would have on your finances.
Downsize Your Home
While it may not be ideal, downsizing could make you financially secure. If you own the home free and clear, you will receive most of the money when you sell the home, minus the standard seller’s closing costs. You are then free to buy a home that you can pay cash for outright. Then you don’t have to worry about paying any mortgage fees or interest.
Many retirees end up buying a townhome or condo after they downsize from their family home. This allows them to still have a home they can call their own, but they don’t have to worry about the exterior maintenance. This can be a blessing as you age.
Sell and Rent
Finally, you may even want to consider selling your home and renting. If you know you only have a few years left, why waste the money on a home purchase? Renting takes all responsibility off your hands for any type of maintenance. This means both physical and financial responsibilities. You can opt to move into a home that is for older seniors. These homes often provide more than physical assistance for the building structure. They also provide assistance for your health and provide a welcome social atmosphere for the older generations.
While a reverse mortgage might seem like your only option to gain financial freedom, you have other options. A reverse mortgage could end up costing you more money than you realized, taking away from your hard earned investment. Consider the above options to see if they might provide you with a more favorable outcome.