Reverse mortgage vs. HELOCs. What happens if you do a reverse mortgage but realize it might have been a mistake? Is a reverse mortgage better than a home equity loan or line of credit? And what are some other ways to tap your home equity other than taking out a reverse mortgage? Several different fintechs are trying to figure out how to crack the home loan nut.
Did I make a mistake getting a reverse mortgage? What can we do now?
Q: I guess it may be too late but figured I’d ask. We did a reverse mortgage. We got almost no cash out of it, but it is eating up whatever equity remains with our loan that has an effective interest rate of almost 5 percent. Is there anything we can do? Thank you.
A: Reverse mortgages have been around for more than 20 years. The concept is enticing: If you’re over the age of 62 and you have equity in your home, there are a number of lenders who will give you a loan for a certain percentage of available equity (often up to 85 percent, but sometimes quite a bit less). The loan provides you with cash and no requirement to repay the loan until the home is sold or the owners pass away.
Reverse mortgages: Good for “house rich, cash poor” seniors
A reverse mortgage can help if you’re house rich and cash poor, and want to stay in your home but need funds to make repairs, pay off the mortgage to lower your cash burn, or even augment your retirement income. But it comes at a fairly steep price: a higher interest rate plus higher fees. The higher fees eat away at the amount of cash you’ll get. The higher interest rate eats away at your remaining equity. And, you still have the requirement to pay your real estate property taxes and homeowners insurance premiums.
Don’t qualify for a HELOC? If over age 62, try a reverse mortgage
It sounds like you needed cash, maybe didn’t qualify for a home equity line of credit (HELOC) and turned to a reverse mortgage as a way to secure the funds you required. The problem is the one you now face: You had a home without much in the way of equity, took what you could, and now have run through the cash and are out of options to get more. It’s an unfortunate position to be in if returning to work is no longer an option or possibility.
Options for unwinding a reverse mortgage
When we get asked about reverse mortgages, we’ll often recommend the following:
- Sell the property, take whatever equity that’s left and rent something that’s affordable.
- Move in with family or into some sort of shared living arrangement to cut costs.
- If you have income, try to do a home equity line of credit (HELOC) or refinance to pay off the reverse mortgage.
Selling and moving is hard – no matter how old you are
A lot of times, seniors balk at moving. It’s a lot of physical and emotional work to go through and toss years (or decades) of accumulated stuff or they simply can’t fathom the idea of fixing up the property in order to sell the home quickly. Staging a home isn’t simple, especially if the home in question hasn’t been updated in a long time – which often happens when homeowners are short of funds.
Selling, though, remains a valid option for you. And, the sooner you sell your home, the more remaining equity you’ll preserve. If you live in an area of the country that has experienced rising home prices, there may be something left after you pay off the reverse mortgage company.
Or not. But at least you won’t be forced to make ongoing real estate tax and insurance premium payments.
“Fintechs” and “Proptechs” offer new ways to tap home equity besides reverse mortgage, HELOC
What else could you have done? There are a number of new financial technology companies (called “fintechs” or “proptechs”) playing in this space that are trying to find novel ways to allow you to tap into your equity outside of a traditional home equity line of credit (HELOC), second mortgage, or reverse mortgage. Here are three to check out:
- HomeTap, for example, makes an investment in the property in exchange for taking an equity stake in your home. Currently offered in 15 states, the company takes an ownership stake in the property, making a bet against the future value of your home.
- Unison, which is available in 30 states and converts “up to 17.5% of your home’s value to cash” and “in return, we share in a portion of your home’s value when you decide to sell.”
- Unlock Technologies, whose website says “a typical agreement might exchange 10% of the current home’s value (cash to you) for 16% of the future home’s value (the Unlock Share).”
Be aware: Some of these fintechs and proptechs will be successful, while others may disappear without much fanfare.
HomeTap might replace a reverse mortgage
HomeTap works like a shared appreciation mortgage: The company takes an investment stake in your house. You get the cash today and you don’t have to make any monthly payments. When you sell, the company gets the value of its stake from the proceeds. If the home has gone up in value, HomeTap gets a little extra. If it goes down in value, HomeTap gets less.
For example, if your house is worth $100,000 and HomeTap takes a 25 percent investment share, you would get $25,000, minus a 3 percent fee, the appraisal fee and the title and filing fees. Over the years the home’s value rises, so let’s say when it’s time to sell the property is worth $200,000. When you sell, the value of their stake would now be worth $50,000. You would receive the remainder of the equity once closing costs were paid. (You pay 100% of the closing costs.)
Sounds good, but as with any financial product, you have to read the fine print: In addition to the fees, you have to settle the investment within 10 years, either by selling the property, refinancing it or simply paying off whatever equity the company holds. Your property has to qualify based on an appraisal but unlike a reverse mortgage, it’s available to homeowners of any age.
Reverse mortgage remorse: next steps
For you, a few next steps:
- Spend some time going through all the numbers to understand where you stand financially with the reverse mortgage. What if your financial situation is actually okay, but you’re suffering from buyer’s remorse? You need to understand what your true financial picture is, where you want it to be, if you’re really okay with not leaving much (if anything) to your heirs, and what options you have going forward.
- Talk with a local mortgage lender and real estate agent. Find out if you have enough equity and income to refinance out of the reverse mortgage or what sort of net price you could expect if you decide to sell.
- Pack and move. If you don’t have enough cash to make your insurance and property tax payments, the smartest thing you can do is pack up your home and move to a more affordable home.
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