According to AARP, some 87% of seniors plan to remain in their own homes indefinitely as they “age in place.” If you are among that percentage, you just might find that you will eventually need additional assets to either modify it and/or pay for medical care or in-home care. If so, you may actually already have those assets—in your existing home. And they can be quickly tapped either through a reverse mortgage or a Home Equity Line of Credit (HELOC).
Reverse Mortgages Reverse mortgages (also called Home Equity Conversion Mortgages) were developed by the Department of Housing and Urban Development (HUD) specifically for the purpose of helping seniors stay in their homes until the end of their lives.
Simply put, a reverse mortgage is a type of home equity loan reserved for homeowners over age 62 who own their home outright or have a small mortgage. A reverse mortgage does not require monthly mortgage payments. Instead, it pays you a lump sum, a regular monthly payment, a line of credit or some combination based on a maximum of 70% of your home’s value and your current age (which determines the length of time the payouts must cover).
When you move out of your home or die, either you or the estate has the option to repay the loan or put the home up for sale to settle it.
A reverse mortgage makes the most sense for people who:
- Don’t plan to move.
- Can afford the cost of maintaining their home.
- Want to access the equity in their home to supplement their income or have money available for a rainy day.
Payment options may include:
- Monthly Payments – You’ll receive guaranteed monthly payments for a set period of time or for as long as the home is your primary residence. This is referred to as a “reverse annuity mortgage”.
- Lump Sum Payment – Typically used to pay off an existing mortgage or your home’s accessibility. Medicaid, VA Pension, and SSI recipients should investigate how a lump sum payment might affect their eligibility.
- A line of Credit – (See HELOC) This allows you to decide when you need the money and how much to borrow. Interest is not charged on the balance of the loan that is not taken.
- Modified Combination – A senior can opt to receive a line of credit, as well as monthly payments for the duration the home is their primary residence, or for a set period of time.
As a Reverse Mortgage comes with strict rules regarding homeowners’ insurance, mortgage insurance, and home maintenance, it easy to default on the loan, in which case the home would be put up for sale. Experts also warn that you could run out of the equity in their home and still need care.
- Between 20% to 70% of the home’s value can be borrowed.
- Funds can improve monthly cash flow.
- Does not require monthly payments from the borrower.
- Proceeds can be used to pay off debt (including the existing mortgage) or settle unexpected expenses.
- You can never owe more than the value of your home.
- Reverse mortgages do not affect your Medicare or Social Security benefits but can potentially impact Supplemental Security Income, Medicaid, and Veterans’ Pension eligibility.
- Reverse mortgage payments are not counted as income if they are spent on care in the same month they are received.
- Lenders cannot force you out of your home.
- You can live outside the home in a nursing home or in assisted living for up to 12 months before the reverse mortgage becomes due and payable.
- You or your heirs are only required to repay the value of the home, even if the value of your home has decreased. This protects your estate from owing money after the home is sold.
- Fees and other closing costs can be high—2% to 8% of the loan amount.
- You must remain living in the home.
- The borrower must maintain the house and pay property taxes and homeowners insurance.
- A reverse mortgage can complicate one’s wish to keep the house in the family.
- Interest on the loan is not paid until the house is sold or the owner passes away so it is not deductible until that time.
- The loan balance will increase over time as interest accrues on the amount borrowed.
Reverse mortgages typically take 4-8 weeks to process. You can locate an FHA-approved lender by searching online or calling (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.
If you’re interested in taking out a reverse mortgage, you’re required to receive mandatory (free) counseling by an independent third party, including an agency approved by the Department of Housing and Urban Development (HUD) or a national counseling agency such as AARP.
HUD also warns that if you are interested in a reverse mortgage to beware of scam artists that charge thousands of dollars for information that is free that is otherwise through their counseling services.
Home Equity Line of Credit (HELOC)
While financial planners believe that a home equity loan is best used for things that will increase your home’s value (as it is disbursed in a one-time lump sum), A Home Equity Line of Credit (HELOC) loan could be a viable option to pay for ongoing home modifications that will allow you to age-in-place and/or pay for home care over a period of years.
Just like a reverse mortgage, a HELOC is secured by the equity in your home. Generally, your line of credit depends upon the equity you have in your home—the greater the equity, the greater the line of credit.
Instead of receiving a recurring payment as you would with a reverse mortgage, however, you would instead be told the maximum amount that you can borrow. You would then have the flexibility to withdraw money up to that limit on an as needed basis.
In effect, a HELOC is similar to a cash advance on a credit card, except that interest would be charged at a much lower rate as it is secured by your home. As a result, a HELOC makes the most sense if you:
- Need a short-term loan of fewer than five years.
- Don’t meet the minimum age requirements of age 62 for a reverse mortgage.
- Are too close to age 62 and wouldn’t be allowed to borrow as much as a HELOC would allow.
- Want to access the equity in your home to supplement your income or have money available for a rainy day.
- Need a large lump sum to move into a retirement community until your house is sold.
With a HELOC, there is a “draw” period, during which time you would be able to withdraw money, followed by a “repayment” period. A “draw period” of 5 – 10 years is very common, while the “repayment” period may be 10–20 years.
At the end of the “draw” period, you would pay back the loan in a lump sum, including interest (usually by selling the house), or in monthly payments. Be aware that not all HELOCs offer a “repayment” period. Instead, the full amount borrowed, plus interest would be due at the end of the “draw” period.
- There is no requirement that you remain living in the home. • No closing costs. • No fees for cash draws.
- Low-interest rates.
- Pay interest compounded only on the amount you draw, not the total equity available in your credit line.
- May offer the flexibility of interest-only payments during the draw period.
- Interest paid is usually tax-deductible in the year it is paid.
- You have the ability to covert an adjustable-rate loan to a fixed-rate loan.
- You can pay it off whenever you like.
- Use it as you wish.
- A HELOC does not have the same consumer protection as a reverse mortgage. Failure to repay the loan can result in foreclosure.
- Banks have the power to freeze HELOC loans with little to no warning.
- If you only make the minimum payment, you’ll never pay off the principal and you or your estate will continue to have debt until it is paid off.
- If you’ve just been covering the interest with your payments, your monthly payment could jump from a few dollars a month to hundreds when you reach the end of your draw period.
- There could be hidden fees if: you terminate the loan early, don’t maintain a minimum loan balance; never actually take money from the account; fail to borrow a certain amount each year or for each check you write.
- If your home declines in value, you could owe more on your mortgage and HELOC combined than your home is worth.
- Rising interest rates can increase your payment.
You can apply for a home equity line of credit online or at almost any bank. However, by completing a loan application online with a loan consolidator, you can get multiple offers that are easily compared and require no commitment on your part.
If you’re planning to age in place, a reverse mortgage or home equity line of credit can help you remain in your home by ensuring regular monthly payments or cash as you need it. However, as with any offer you encounter along the gray mile, do your due diligence. Know the pros and cons before you make any decision that could put your home or finances at risk.