Alternatives to a Reverse Mortgage
Before you succumb to the temptation
to tap into your home equity with a reverse mortgage, consider some of the Alternatives to a Reverse Mortgage available to seniors.
Rex
Agreements
A REX Agreement can, in some
cases, be a reasonable alternative to a reverse mortgage. You can convert up to
50% of your single-family home's value into cash (maximum $300,000) by giving
EquityRock, which administers the real estate investment agreements, an option
to take a cut of the profit when you sell your house.
Unlike a reverse mortgage, it's only
available in 14 states—California, Colorado, Connecticut, Florida, Illinois,
Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon,
Pennsylvania, Virginia, and Washington—and age is no barrier. You must have a
minimum 25% home equity and a good credit history to qualify.
Because a REX Agreement isn't a
loan, there are no monthly payments or interest charges. And while the
comparison isn't apples to apples, it costs much less to close on a REX than a
reverse mortgage. If your home is worth $250,000, for example, you'd pay
third-party closing costs for both a reverse mortgage and a REX of about
$3,000.
For a reverse mortgage, you'd also
pay a $5,000 origination fee and a $5,000 upfront fee for mortgage insurance.
(Keep in mind, however, that reverse mortgage expenses are rolled into the loan
rather than coming out of pocket.) When you sell your home, EquityRock will be
entitled to a chunk of the proceeds.
The more profits you're willing to
give up in the future, the more money a REX will land you now. Let's say you're
75 and own a home valued at $250,000. If you opt for a REX with a 50-50 profit
split, you'd receive $31,250. In a typical scenario, the same 75-year-old could
take $67,742 from a reverse mortgage, about half of what he'd qualify for,
according to AARP.
If you sell in 12 years for
$500,000, you'll owe $203,771 on your reverse mortgage, which would leave you
with $296,229. With a REX, you'd walk away with $375,000 (minus transaction
costs and your original $31,250 advance). But if you sold your home for
$750,000, a reverse mortgage would net you $546,229, while a REX would earn you
less: $500,000 minus costs and the advance.
A REX really pays off if you sell
your home at a loss after five years, when the agreement's penalty period
expires. In this scenario you'd keep the cash fronted to you and all of the
sale proceeds. Remember, EquityRock is only entitled to a cut of profits. With
a reverse mortgage you'd still need to pay back the loan.
Since EquityRock isn't in the
charity business, expect the company to offer less cash, or even turn down
applications, in areas where there's perceived risk that home prices won't
appreciate at an attractive pace.
Also watch for low-ball appraisals, which can
come back to haunt you when you sell and split the profits. Another area of
concern is taxes. With a REX agreement, the money you receive is
tax-deferred—you'll need to pay Uncle Sam eventually. Consult a tax advisor.
Home
equity line of credit (HELOC)
A HELOC seems like a sensible
reverse-mortgage alternative. You gain access to a line of credit, the money
can be tapped when you need it for anything you want, rates are typically lower
than those on credit cards, and you may even be able to write off the interest
come tax time. The closing fees tend to be low too.
The first-blush advantages retreat
as you probe further, however. With a typical HELOC, you make interest-only
payments during the first 10 years. This is known as the draw period. After
that, you're required to make monthly principal and interest payments that are
usually based on an adjustable rate.
If you take out a HELOC, you will
not have to pay off your traditional first mortgage. When you take out a
reverse mortgage, you must pay off any balance remaining on your first
mortgage.
Fall far enough behind and the bank
can take your home. Lenders can also terminate HELOCs or reduce the amount
available for borrowing. Another reason that a HELOC isn't ideal for retirees
is that qualifying means producing proof of income.
Lifestyle
changes
Even though you love your home, if
it becomes a financial burden, you may need to consider options other than
borrowing. You could sell the house and rent a smaller one or an apartment.
Some rents even include utilities. Or consider moving in with a family member.
Don't assume you'll be a burden—you may actually take the burden off your loved
one by pitching in with babysitting or cooking.
With the cash that you'd be
pocketing from the sale, and your reduced living expenses, you could fund your
retirement without taking on any additional debt. If you absolutely must keep
your home, a part-time job will increase cash flow. Or consider getting a
roommate. You'll lose some privacy, but you'll gain peace of mind.
Barbara Eisner Bayer has written
about mortgages and personal finance for the past 15 years for Motley Fool,
Daily Plan-It, and Nurse Village, and is the former Managing Editor of
Mortgageloan.com and Credit-land.com. She splits time between a beachfront
condo and a mountain retreat, which leaves her with double the pleasure and
double the headaches of home ownership.
Do you have a Reverse Mortgage? What are your Alternatives to a Reverse Mortgage?
"Visit HouseLogic.com for more articles like
this. Reprinted from HouseLogic.com with permission of the NATIONAL
ASSOCIATION OF REALTORS."
Related Articles: http://bonniehicksrealtor.wordpress.com/2012/12/19/reverse-mortgage-loans-pros-and-cons/
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