A reader asked us “I am not sure if a reverse mortgage is right for me, what are some alternative options?”

Before getting a reverse mortgage, consider the following…

  • how much will your home be valued at? if the local real estate market is currently depressed you might be selling your home for a fraction of its value in a few years. if the local market is hot, a reverse mortgage may allow you to enjoy many of the benefits of selling without requiring you to leave your home.
  • do you want to pass the house on to family members? in some cases you may be able to get a loan from family members which helps keep you in your house without giving up the house
  • are you comfortable with where you live?or are there other places or living conditions (renting an appartment, assisted living communities, a smaller home in another area, etc.) that might be more comfortable for you?
  • consider family conditions. do other family members need capital which you can help them with? some reverse mortgages allow you to get a lump sum upfront, though in some cases you may be better off selling your home outright. another family related option is to consider having trusted family members live with you through your final days, and pass the house on to them.

If you want to avoid obtaining a reverse mortgage here are some alternate means to raise capital

  1. Work longer, and/or save more aggressively while you are working.
  2. Reduce your living expenses.
  3. Keep yourself in good health to minimize health costs and keep yourself self-sufficient for as long as possible.
  4. Sell your house and move into a smaller home or a home in a more affordable area.
  5. Take on a friend as a boarder who can help share expenses, but make sure they are trustworthy before asking someone to move in.
  6. Establish a home equity line of credit (HELOC), and draw out cash on an as needed basis, paying back the minimum interest only payments. While this can save you money in the short run, the risk with this strategy is if you end up borrowing more than you can afford to you may end up needing to sell your house while you are still living.
  7. Rely on family, friends, & charities. If you go with this approach make sure you have a safety net to minimize your stress level and maximize the enjoyability of your remaining years.

There are primarily 3 types of reverse mortgages

  1. single-purpose reverse mortgages – generally provided by state and local government agencies, and some non-profit organizations
  2. federally-insured reverse mortgages– also known as Home Equity Conversion Mortgages (HECMs), these loans are backed by the US Department of Housing and Urban Development (HUD)
  3. proprietary reverse mortgage loans – private loans backed by the companies that offer them.

Single-purpose Reverse Mortgages

Single-purpose reverse mortgages typically have the lowest cost structure. These loans tend to be the most restrictive though, as they are usually only available to low to moderate income individuals, are typically quite limited in size, and the loan can only be used for the purpose specified by the lender, ie: property taxes, home improvement, etc.

To see if you qualityfy for a single-purpose reverse mortgage contact the local Area Agencies on Aging (AAAs) by looking them up online at www.eldercare.gov or calling toll-free, 1-800-677-1116.

Home Equity Conversion Mortgages

Home Equity Conversion Mortgages  have a significant upfront cost (including a 2% origination fee and a 2% insurance premium), so if you only intend to stay in your home for a short period of time they can be quite expensive. If you live in your house for an extended period of time the cost is divided amongst many years, and is thus more reasonable.

  • Unlike single-purpose reverse mortgages, you can use a HECM loan for any purpose.
  • HECMs are the most popular reverse mortgage, with roughly 90% of reverse mortgage borrowers choosing them.
  • Since HECMs are federally insured they typically allow larger loan advances than other reverse mortgage formats, and are ideal for homes worth less than $400,000.
  • The payouts depend on a variety of factors – including age, home value, how much you own, where you live (particularly rural vs urban areas), and interest rates.

Proprietary Reverse Mortgage Programs

If you own a large and/or high-valued home your desired loan amount may exceed the limits of a traditional HECM. There are a number of proprietary reverse mortgage plans that may suit your needs.

  • Fannie Mae sponsors the Home Keeper reverse mortgage loan program, which offers a slightly higher loan limit ($417,000 in 2007) than a traditional HECMs, and is more flexible, allowing seniors to buy a new home with a down payment (perhaps from the sale of an old home) and a reverse mortgage.
  • Financial Freedom is one of the more popular private companies offering jumbo reverse mortgage loans, under their Cash Account Advantage plan. Under their Cash Account Advantage plan they offer  an Equity Choice Feature which allows you to preserve anywhere from 10% to 50% of your home’s value.

Reverse mortgage loans offer borrowers an array of options for receiving cash.

  1. Monthly payments (either for a fixed number of months or for as long as you live).
  2. A lump sum cash payment.
  3. A line of credit where the borrower decides how much cash they need and when they want to use it
  4. Any combination of the above

While living in the home it is the duty to maintain and repair their home, keep it insured, and pay their property taxes. If at any point they fail to do those the loan can become due in full. As long as a homeowner fulfills those obligations they can never own more than the value of their home, even if they live an unexpectedly long time and have received payments worth more than the value of their home.