Should my wife and I look for an alternative to a reverse mortgage?
My wife and I are thinking about getting a reverse mortgage. Our home is valued at $190,000, we have a first mortgage of $65,000, and an equality loan of $15,000. Our current first mortgage rate is 5.0% with a 30 year fixed rate. My question is, should we go with a reverse mortgage or is there a better alternative to a reverse mortgage? I am 68 years old, my wife is 72, we have a fixed limited income, and need to lower our monthly rate. What do you recommend as an alternative to a reverse mortgage, if any?
This is an excellent question. There are a few simple things you want to ask yourself first:
- Is it our desire to remain in our homes as long as possible?
- Is it financially sensible for us to stay in our home as it exists now
- How would or could our life/retirement be different if we no longer had to make a monthly loan payment?
An honest answer to those questions will open up a broader conversation about the best ways to use Home Equity in Retirement Planning. Here are a few possible scenarios:
- Today's HECM Reverse Mortgage will make around 50% of your homes value available (maybe a little more). So lets say around $100,000
- From that you would pay off the $65,000 and the $15,000 loans respectively
- The Big Question is: What does eliminating that mandatory monthly loan payment do for your Lifestyle and Retirement?
Since you are on a fixed limited income, does the savings that comes from not having to make a monthly loan payment make sense and add value. If it does then the HECM is worth exploring. If not, then here are a few common alternatives:
- Sell the home and rent (even senior subsidized rental) depending on your situation. This allows you to create a nest egg after the sale of over $100,000 and you live off of that combined with your current income
- Sell the home and downsize or supersize using the HECM for Purchase. This too creates a nest egg, but using the HECM for Purchase also eliminates the need for mortgage payments in your new home
- Refinance to a lower rate and lower payments. Because of your age, fixed income and inflation, this solution may just be putting a Band-Aid on the problem as you would still have a monthly mortgage payment and the stress of making that payment as you age
I suggest answering the questions above. I did a PBS sponsored video on Reverse Mortgages in Retirement Income Planning, you can find it by clicking HERE -dg
You have three good alternatives to the reverse mortgage ay your age.
1. Refinance Your Existing Mortgage
If you have an existing home loan, you may be able to refinance your mortgage to lower your monthly payments and free up some cash. One of the best reasons to refinance is to lower the interest rate on your mortgage, which can save you money over the life of the loan, decrease the size of your monthly payments and help you build equity in your home faster. Another perk: If you refinance instead of getting a reverse mortgage, your home remains an asset for you and your heirs.
2. Take Out a Home-Equity Loan
Essentially a second mortgage, a home-equity loan lets you borrow money by leveraging the equity you have in your home. It works the same way as your primary mortgage: You receive the loan as a single lump-sum payment, and you cannot draw any additional funds from the house. The interest you pay is generally tax deductible for loan amounts up to $100,000.
These are generally fixed-rate loans, which provide security against rising interest rates. Because of that, the interest rate is typically higher than for a home equity line of credit. As with refinancing, your home remains an asset for you and your heirs. Because your home acts as collateral, it’s important to understand that your home is at risk of foreclosure if you default on the loan.
3. Take Out a Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, gives you the option to borrow up to your approved credit limit, on an as-needed basis. Unlike a home equity loan, where you pay interest on the entire loan amount whether you’re using the money or not, with a HELOC you pay interest only on the amount of money you actually withdraw. HELOCs are adjustable loans; your monthly payment will change with fluctuating interest rates. The interest is generally tax deductible for loan amounts up to $100,000, and your home remains an asset for you and your heirs. As with a home-equity loan, your home acts as collateral and could be foreclosed if you default.