“There are quite a few misconceptions about reverse mortgages that I’ve come across over the years,” Auerswald says. “One big one is the fear that the bank will own your home — this simply isn’t true; you retain ownership.”
Execs and cons of an HECM mortgage
A house fairness conversion mortgage (HECM) has each benefits and downsides. Right here’s a fast overview:
Execs
- No month-to-month mortgage funds: You’re not required to make month-to-month funds on the mortgage, which might release your money move throughout retirement.
- Entry to residence fairness: An HECM permits you to faucet into your private home’s fairness with out having to promote your private home or transfer.
- Versatile fee choices: You possibly can select to obtain the funds as a lump sum, month-to-month funds, a line of credit score, or a mix of those.
- Non-recourse mortgage: You or your heirs won’t ever owe greater than the house’s worth when the mortgage is repaid.
- Tax profit: Based on the IRS, reverse mortgage funds are thought of mortgage proceeds and never revenue
- It’s nonetheless your private home: You keep the title to your property so long as you fulfill the mortgage obligations.
- Keep different advantages: Cash from an HECM sometimes doesn’t have an effect on your Social Safety or Medicare advantages
Cons
- Prices can add up: Charges, curiosity, and mortgage insurance coverage premiums can improve the mortgage stability over time, lowering the quantity of fairness left within the residence. Upfront prices are typically greater with an HECM in comparison with different equity-backed loans.
- Impression on inheritance: The mortgage stability have to be repaid when the final borrower leaves the house, which might cut back the inheritance left in your heirs.
- Potential lack of residence: In the event you fail to satisfy the mortgage obligations, comparable to paying property taxes or sustaining the house, you possibly can face foreclosures.
- Some tax issues: The HECM curiosity is just not tax-deductible till you truly repay the mortgage.
- Rate of interest fluctuations: Relying on the HECM choice you select, your mortgage might have a variable fee, which might improve the associated fee if rates of interest improve.
- Threat of scams: Some scammers goal seniors with HECM schemes.
Whereas an HECM doesn’t require month-to-month funds, Auerswald says debtors should perceive that curiosity will accrue over time. Because of this the mortgage stability will improve, which might cut back the fairness left within the residence.
“It’s important to think about how this might impact your estate or what you plan to leave to your heirs. I always recommend considering your future situation in the home to ensure it remains age-in-place friendly,” he advises. “For example, is the home two stories? Is there too much land to maintain long-term? If you cannot foreseeably stay in the home for your lifetime, it might be better to sell and downsize or rightsize.”
Can I exploit an HECM to buy a house?
“Absolutely!” Auerswald exclaims. “One lesser-known feature of an HECM is that it can be used to purchase a new home through the HECM for Purchase program. This is a fantastic option for those who want to downsize or move to a more suitable home without taking on a new monthly mortgage payment.”
The HECM for Buy program permits you to purchase a brand new major residence utilizing a mix of a reverse mortgage and your individual funds, comparable to proceeds from the sale of your earlier residence or financial savings.
“The process involves making a down payment and using the HECM to cover the remainder of the purchase price. I see this option as a creative solution for many homeowners looking to make a move later in life,” Auerswald says, including, “From my experience, it’s vital to have these conversations with your family and to understand both the benefits and potential drawbacks before moving forward.”
To study extra, see our publish: Shopping for a Dwelling With a Reverse Mortgage (HECM for Buy).
Downsize via a Purchase Earlier than You Promote program
In the event you’re downsizing, HomeLight’s Purchase Earlier than You Promote program permits you to purchase a brand new home earlier than promoting your previous one. This contemporary program allows you to unlock fairness out of your present residence to be used towards the brand new buy, protecting bills like down funds, shifting prices, closing prices, and even repairs.
Together with your fairness funds, you can also make a robust provide in your new home with no residence sale contingency, avoiding the hassles of shifting twice. In the meantime, HomeLight works together with your agent to checklist and promote your previous residence for the very best provide. Watch the quick video beneath to study extra.
Alternate options to an HECM
“Deciding on a reverse mortgage should involve weighing options such as selling, downsizing, or relocating,” Auerswald suggests. “A reverse mortgage is just a tool, like many other financial products, and it’s not a perfect solution for everyone’s situation. If you have short-term needs, a lower-priced equity loan may be more suitable.”
In the event you’re contemplating an HECM however aren’t certain it’s the best match, listed below are a number of options:
- Dwelling fairness mortgage or line of credit score (HELOC): These choices mean you can borrow in opposition to your private home’s fairness whereas retaining full possession. Nevertheless, in contrast to an HECM, they require month-to-month funds.
- Money-out refinance: A standard cash-out refinance replaces your present mortgage with a brand new, bigger mortgage. You obtain the distinction in money. That is additionally an choice if your private home is paid off.
- Promoting your private home: Downsizing or shifting to a cheaper space can release fairness and cut back housing prices with out taking over a brand new mortgage.
- Private loans: In the event you want a smaller amount of cash, a private mortgage is perhaps a extra simple choice with out involving your private home’s fairness. This various, together with bank cards, sometimes prices extra and is widespread for owners searching for a short-term answer.
Auerswald factors out that an HECM is totally different from a standard residence fairness mortgage or HELOC in a number of key methods.
“Unlike a home equity loan, where you make monthly payments, an HECM doesn’t require any payments as long as you live in the home and maintain the property charges such as taxes and insurance,” he explains. “The biggest difference between an HECM and a home equity line of credit (HELOC) is suitability. A HELOC requires monthly payments and is often attached to adjustable rates. A significant concern with HELOCs is that they can be balloon notes, meaning the full balance may become due and payable [when the term ends], typically in 10 years.”
Auerswald provides a warning: “If you aren’t prepared to repay the HELOC at that time, the bank can foreclose. This cannot happen with an HECM, and the HECM line of credit is guaranteed for your lifetime.”
