This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer this type of loan. Any information described in this article may vary by lender.
A reverse mortgage is a loan for homeowners 62 and up with large home equity looking for more cash flow. There are a few types of reverse mortgages, but there are also alternatives that might work better for your needs. For example, if you’re approaching retirement age but would like to explore mortgage options, some alternatives including refinancing or a home equity loan may work best.
What is a reverse mortgage and how does it work?
A reverse mortgage is a loan for homeowners 62 and up with a large amount of home equity. The homeowner can borrow money from a lender against the value of their home and receive the funds as a line of credit or monthly payments.
When you typically think of a mortgage, the first thing that may come to mind is a forward mortgage. A forward mortgage requires the homebuyer to pay the lender to buy a home, whereas a reverse mortgage is when the lender pays the homeowner against the value of their home.
Once the homeowners move, sell their home or pass away, the reverse mortgage loan is paid back. If the home depreciates in value, the homeowner or their estate is not required to pay the difference if the loan exceeds the home value.
What are the three types of reverse mortgages?
- Single-purpose reverse mortgages: the most affordable option out of the three. They are typically only executed for one purpose, which is often specified by the loaner. An example could be a big home repair, like a roof replacement. Single-purpose reverse mortgages are most common for homeowners with low to moderate income.
- Proprietary reverse mortgages: more expensive and most common for homeowners with a higher home value, allowing the borrower to access home equity through a private lender.
- Home Equity Conversion Mortgages (HECM): the most common, but still more expensive than single-purpose mortgages. HECMs are federally backed by the U.S. Department of Housing and Urban Development (HUD). A HECM line of credit can usually be used at the homeowner’s discretion, unlike the single-purpose reverse mortgages.
What is the downside of a reverse mortgage
There are a few downsides of a reverse mortgage. When you take out a reverse mortgage it lowers the value of your home equity since you’re borrowing against what you already own. For example, if you own $100K of your home and you use $50K in a reverse mortgage, you now only own $50K of your home.
A reverse mortgage could also affect the ownership of your home down the line. If you live with someone and take out a reverse mortgage that you or they can’t pay back, they may lose their living arrangements in the event of a foreclosure.
Don’t forget that although a reverse mortgage can provide you with a line of credit, you are still in charge of other living expenses like taxes and insurance.
Finally, be wary of who you are borrowing money from. There are private companies or even less legitimate lenders who could take advantage of your situation or lend you something beyond your means.
What are alternatives to a reverse mortgage?
A reverse mortgage may be expensive and create more complications involving home ownership and debt. There’s also the possibility that you may not qualify for a reverse mortgage but are in need of assistance. Luckily, there are other options out there.
- Sell your home
- Apply for a home equity loan
Selling your home
Selling your home will unlock your equity and provide you with cash flow that may exceed your expectations if your home value has appreciated. The downside to this may be that you’d need to relocate. But if your home has appreciated in value, you could sell, downsize, and save or invest the extra cash.
Refinance your home
Refinancing your home could get you lower month to month payments and free up some cash. This usually means restarting the clock on a mortgage, but it also means potentially securing lower interest rates.
If you have high home equity, a cash-out refinance may be a good option. A cash-out refinance replaces your mortgage with a higher loan than what you owe. The difference between your original mortgage and the loan is provided in cash, although the loan is limited to around 80 percent of your home equity rather than 100 percent.
Home equity loan
A home equity loan is a lump sum of cash given to you by the lender, using your home as collateral. Home equity loans usually offer competitive interest rates and are good for a one-time use, like to pay off a home improvement or other debts.
What can reverse mortgage alternatives be used for?
Reverse mortgage alternatives can come in the form of cash, a line of credit or a general lump sum of money — depending on which direction you go in. You can use it for home repairs or debt repayments, unless your loan conditions restrict you to a certain cause.
How to decide
Deciding on a reverse mortgage or a reverse mortgage alternative depends on your age, home equity and what you need your loan for. If you are 62 and up with a lot of home equity, a reverse mortgage could be for you. Keep in mind the downfalls of a reverse mortgage, especially the depreciation of home equity and how it might affect your estate.
A reverse mortgage can be helpful in specific circumstances for people 62 and up looking to liquidate some of their home equity. There are many alternatives to this type of mortgage that might be better suited for you and provide less of a headache in the process. Consult with a Home Lending Advisor when considering your options.