Why a HECM Loan is Better Than These Alternatives to Reverse Mortgages for Seniors

weighing the alternatives to a reverse mortgage
By: Joshua Wilson
February 28, 2020

As you examine your retirement options, you may consider using a Home Equity Conversion Mortgage, commonly called a HECM loan or a reverse mortgage. HECMs are designed to free up cash flow for homeowners 62 and over who have considerable equity in their homes. HECM terms vary based on factors like borrower age and the loan’s interest rate, but generally, the less you owe on your home, the more cash you will have available to use. Find out how much you qualify for with our free reverse mortgage calculator.

Also known as a reverse mortgage, a HECM converts your equity into funds you’re able to spend as you see fit, enabling you to pay for general living expenses or unexpected medical costs. This option allows you to use your home equity without having to move out of your house or relinquish ownership. Unlike traditional mortgages, you don’t typically need to repay your reverse mortgage as long as you meet your loan obligations, which means staying up to date on property taxes, homeowner’s insurance, and property maintenance. You might be wondering if a reverse mortgage is right for you. Below, we will explore some of the alternatives to reverse mortgages and if they may be a good fit for your particular situation. You can navigate directly to the reverse mortgage alternative you’re interested in learning more about or keep reading for a full overview. Find out more about reverse mortgages by clicking the link below.

Downsizing

When you’re examining reverse mortgage alternatives, you may consider downsizing. The idea behind downsizing is simple: you sell your primary residence, buy a new one for a significantly lower price, and then use the leftover cash to supplement your retirement income. You could spend it slowly over time or invest the sum that you get from the sale of your property. You could also buy an annuity that pays out a fixed income over the course of the rest of your lifetime. The main benefit of downsizing is it means you’ll have the cash you can spend outright, invest, or pass it on to your heirs. However, the drawback is that downsizing forces you to leave your home. For seniors who are looking to keep their home and continue living there, a HECM may be the solution. You free up critical cash flow that you won’t have to pay back until you move out or pass away—and you still live in and own your home until the loan matures.

Selling to a family member

Another alternative to reverse mortgages for seniors: selling the property to family members. You can stay in your home and set up a sale-leaseback agreement, in which you sell the home to relatives and rent it back with the funds from the sale of the house. This provides your heirs with rental income while letting you remain in your home. If you decide to go this route, make sure that you have a written contract. Mixing business with family, especially with something as valuable as a home, may be risky. The negative aspects of this choice include the unnecessary inter-family strain mentioned above and the requirement to have a family that could qualify to buy a home in the first place. Additionally, if you’re selling your home for a lower price to a loved one, it would reduce the amount of cash available to you. The legal proceedings needed to oversee a family sale of the house might also lead to a higher overall expected cost.

Refinancing

If you currently have a high-interest rate on your home mortgage, you might be able to save more money and free up cash by refinancing. Plus, you will still own your home and be able to pass it onto your heirs. Refinancing might be a good option if you have a substantial amount of equity in your home and you don’t need a lot of money fast. A refi allows you to continue to build the equity in your home over time. The drawbacks, however, include having to make mortgage payments every month. In addition, there’s a possibility you may end up having to pay more than the original loan. For example, if your term is extended during refinancing, you might end up paying less each month, but find that you need to make payments longer. This results in a higher overall cost. In addition, if you do end up missing a payment on your house, banks can foreclose on your home.

Home Equity Loan or Home Equity Line of Credit (HELOC)

A home equity loan: this alternative to a reverse mortgage delivers proceeds in the form of a lump sum, based on the equity you have in your home. You’ll likely get more upfront cash with this option. However, you immediately need to pay back both the principal and the interest. If you miss payments, your lender can foreclose on your home. With a reverse mortgage, on the other hand, you don’t have to pay anything back until your loan matures. A Home Equity Line of Credit (HELOC): a HELOC allows you to borrow money against the equity in your home for a certain period of time, in the form of revolving credit. However, at the end of the draw period, you’ll enter the repayment period where your payment each month is due until the HELOC is paid off. If interest rates increase over time, so could your monthly repayment. Plus, if you overspend and use too much of your home’s equity, you might put yourself into a precarious financial situation later and face large interest payments in addition to the principal amount. A reverse mortgage line of credit works like a HELOC in that the proceeds can be drawn upon on an as-needed basis. However, the loan doesn’t require any repayment until the last homeowner or borrower living in the home passes away or moves out. Borrowers with a HECM loan are, however, liable for paying property taxes, insurance, and maintenance.

Assistance programs

You may find that you qualify for assistance such as property tax relief, help to pay for your medical costs, or discounts on your energy bills. The National Council on Aging (NCOA) can help you find government benefits that will save you money. Of course, the issue here is that those savings may not be enough to help you stay afloat. A reverse mortgage, on the other hand, gives you access to critical cash flow.

Renting

You may also choose to rent out your property. Ideally, you can choose to rent to someone you know, like a close friend or family member. Renting may allow you to stay in your home because of the additional rental income. You could pay off the mortgage you still owe with those proceeds or put it toward property taxes or maintenance. Unfortunately, that rental income has to be reported for taxes as income which may dig into your profits. There’s also much more work involved in renting; you’ll need to continually screen and replace incoming and outgoing renters. Professional screening costs money and time. And lastly, sharing a space with renters during your golden years might not be your ideal living situation.

Check Social Security benefits

The earliest you can start drawing on Social Security benefits is at the age of 62. However, if you delay collecting your benefits, you could be increasing your monthly benefits in the future. Why? Remember that those savings compound over time. You may want to consider using a HECM loan in order to strategically delay starting your Social Security benefits, resulting in a bigger monthly payout later.

Reduce the cost of living

Living within your means with a tight budget may be a hard adjustment for seniors accustomed to a particular way of living. But if you are considering a reverse mortgage to cover your basic costs of living, you may want to consider changing your lifestyle as an alternative option. Reducing your cost of living could include the following:

  • Reduce your tax bill by taking less out of your 401(k)
  • Sell one car to reduce gas, insurance, maintenance, and registration costs
  • If you’re going to travel, go during non-peak periods
  • Look for establishments that offer senior discounts

Final thoughts on alternatives to HECMs

HECMs offer a way to get cash from your home without the burdens associated with alternatives, such as monthly loan payments or having to move out. While HECMs might not be the right solution for every situation, if you’re over 62 with a substantial amount of equity in your home, taking out a reverse mortgage may suit your needs. With the right plan, you can live out the retirement of your dreams without worrying about the hassle of monthly payments. Contact us today to learn more about our reverse mortgage application process.

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