Thinking about getting a reverse mortgage? Consider these factors
A reverse mortgage is a way for seniors to borrow against the equity they have in their homes, but they aren’t right for everyone. Consider these options instead. (iStock)
A reverse mortgage is a financing product available to seniors to borrow against the equity in their home. This tool has become even more popular during the pandemic, as homeowners have struggled to stay ahead of their bills.
Despite their popularity, reverse mortgages aren’t for everyone. Aside from the age requirement, these loans have some other limitations. In this article, we’re breaking down when you should and shouldn’t consider a reverse mortgage.
And if a reverse mortgage isn’t right for you, you can use Credible’s online marketplace to see what other lending options you might qualify for.
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What is a reverse mortgage?
A reverse mortgage allows senior homeowners to borrow against the equity they've earned in their homes. The homeowner no longer makes monthly mortgage payments. Instead, they receive money in one of three ways: fixed monthly payments, a lump sum, or a line of credit.
To be eligible for a reverse mortgage, a borrower must be 62 years or older, use the home as their primary residence, and continue to pay their property taxes. Once the borrower no longer lives in the home, either because the borrower dies or sells the home, the mortgage must be paid back.
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When you should consider a reverse mortgage
A reverse mortgage might be a good idea if you’re age 62 or older and need a source of income. The money can be used to pay monthly bills, cover medical expenses, and more. For a reverse mortgage to be a good option, you must have substantial equity in your home since you can only borrow as much equity as you have.
Borrowers don’t have to meet an income or credit score requirement. Since many seniors don’t work in their later years, a reverse mortgage could be the only option.
When you shouldn’t consider a reverse mortgage
A reverse mortgage can be an excellent way for seniors to borrow against the equity in their homes, but they aren’t right for everyone. A reverse mortgage isn’t available to anyone under the age of 62. This loan option also likely isn’t suitable for anyone who wants to bequeath their home to a loved one after they pass away. Because the loan must be repaid when the original borrower passes away, most families ultimately must sell the home to pay back the loan.
To explore your home loan options, you can visit Credible to get in touch with experienced loan officers and get your mortgage questions answered.
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Other options to consider
A reverse mortgage isn’t the only way to get money in exchange for the equity you have in your home. Here are a few other types of loans available.
1. Cash-out refinance
A cash-out refinance is a type of loan where you replace your existing mortgage with a new home loan. But in this case, you borrow more than you currently owe and receive the difference in cash.
Just like a reverse mortgage, a cash-out refinance is borrowing against the equity in your home. Like a reverse mortgage, this option allows you to receive a lump sum in cash and continue living in your home. But to qualify, you must meet income and credit requirements. Additionally, unlike with a reverse mortgage, you must continue making your monthly mortgage payments.
Use Credible’s free online tool to see what cash-out refinance offers you’re eligible for and what interest rate you can get.
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2. Selling your home
Selling your home might be the most drastic way to get money for the equity in your home, but it’s an option. Once you account for any real estate agent commission and other expenses required to sell the home, you keep the remainder of the profit. However, you must find a new home, which will cost money unless you’re planning to live with your family. This option can make sense for seniors if they no longer want the hassle of maintaining a home.
3. HELOC or home equity loan
Home equity loans and home equity lines of credit (HELOCs) are both ways to borrow against the equity in your home. With the loan, you receive a lump sum that you pay back over a specific term. With a HELOC, you have a draw period, during which time you can borrow money as you need it. When the draw period ends, you enter a fixed repayment term.
Home equity loans and HELOCs don’t require closing costs, but you must meet income and credit requirements, and you’ll have another monthly payment to make.
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What’s next?
A reverse mortgage is one way to borrow against the equity in your home, but it’s not the only way. If you’re under 62 or would prefer to explore your other options, use an online marketplace like Credible to see your home loan options and see rates from multiple mortgage lenders.
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