If you are a homeowner at least 62 years of age, a reverse mortgage may be a good way to get instant cash to help you cover your expenses. Not 62 years of age yet? Fortunately, there are other ways to tap into your home’s equity. Continue reading to learn more about reverse mortgages and alternatives such as home equity loans and cash-out mortgage refinancing.
What is a reverse mortgage?
This type of loan allows homeowners to convert part of their home’s equity – the amount they have paid into their mortgage — into cash. Say your house is worth $250,000. If you still owe $150,000 on your mortgage, then your home equity is $100,000. This means you are eligible to get up to $100,000 from a reverse mortgage loan.
Homeowners get reverse mortgage loans for many different reasons, including covering home repairs, medical bills or just day-to-day financial costs. How you receive your reverse mortgage loan money is up to you. You can benefit from a large lump sum or instead receive monthly payments for the duration of the loan.
Unlike a traditional mortgage, anyone taking out a reverse mortgage loan does not need to make a monthly repayment. However, it is important to keep in mind that the loan will need to be paid off if the borrower passes away, moves or sells the property. Additionally, reverse mortgage recipients must keep up with their property taxes and homeowner’s insurance. The loan will go into default if the borrower fails to pay property taxes or homeowner’s insurance.
The payout you receive from a reverse mortgage usually comes as a tax-free sum. However, the loan will accrue interest over time. Be sure to check and compare reverse mortgage interest rates before signing any agreements.
When does it make sense to do a reverse mortgage?
Reverse mortgages can be a good solution for older homeowners who need to access the equity in their home. However, there are times when an alternative should be considered.
Since you must be at least 62 years of age to get a reverse mortgage, younger homeowners will need to opt for an alternative.
It is critical to consider both the pros and cons of a reverse mortgage. While a reverse mortgage loan lets you quickly access your equity, it also means your heirs may need to sell the home in order to pay back the loan.
Before applying for a reverse mortgage, you should always perform a reverse mortgage calculation. You can find reverse mortgage calculators online for free. A reverse mortgage calculator will give you a clearer picture of how you may benefit, including whether you may qualify and how much you are likely to get.
Here are some reasons that a reverse mortgage might be the answer:
- You want to access the equity tied up in your home to fund your retirement.
- You would like to eliminate your monthly mortgage payment.
- You want the loan to give you the ability to remain in your home for the rest of your life.
- You need a way of supplementing your income.
- You need money, but you are unable to qualify for a loan due to bad credit.
What is a home equity loan?
One of the alternatives to the reverse mortgage is a home equity loan, which does not have an age requirement to qualify. With a home equity loan, you borrow money against your property. Your equity in your home is the difference between the current value of your home and the amount you still owe on your mortgage. Calculating your home equity is an important step in deciding if this kind of loan is a good option for you.
There are two ways to get a home equity loan. A traditional home equity loan pays out one lump sum at the start of the agreement. Generally, you can borrow up to 85 percent of your home equity. However, the amount you can borrow will also depend on factors like your income and credit history. As with other loans, you will make monthly payments to pay your home equity loan back. If you are unable to pay the loan back, the creditor can foreclose your home.
The other option you have is a home equity line of credit (HELOC). A line of credit works in a similar way to a credit card: You can borrow and pay off the balance provided it stays within the credit limit. In this case, the limit amount is your equity in your home. Unlike a home equity loan, you only need to pay back what you take out from the line of credit (not the entire amount of the loan).
You are free to take out a home equity loan from any provider. It does not need to be the same lender as your original mortgage lender. Like other loans, home equity loans will charge interest. Be sure to shop and compare rates before agreeing to a home equity loan or HELOC.
Learn About Regular Mortgage Cash-Out Refinance
Another alternative is a cash-out mortgage refinance. This involves taking out a new loan to pay off and replace your old one. A cash-out refinance loan will be larger than the amount you still owe on your house, allowing you to receive the difference in cash.
If you are currently paying a high interest rate on your mortgage, then a cash-out refinance may be a good solution. In addition to getting cash, your refinanced loan may have a lower interest rate, which means you will pay less over the course of your loan. Or, you can switch from an adjustable-rate mortgage, in which the interest rate changes, to a fixed-rate mortgage, in which the interest rate stays the same.
However, a cash-out refinance is also a viable option for those who simply wish to extend the terms of their mortgage and pay a smaller sum each month. For instance, switching from a 15-year mortgage to a 30-year mortgage will lower your monthly mortgage payment.