Every person is unique. Circumstances change. Reverse mortgages can vary from rather simple loans like a lump sum payment to very complex long-term investments such as a line of credit. Depending on your financial situation, you might be better off with a typical forward loan or a kind of refinance. At the end of the day, it comes down to the circumstances. With that said, which financial circumstances are suitable for a reverse mortgage? Is it right for you?
Types of Reverse Mortgages
Let’s start with a fixed rate HECM. This product disperses funds in one lump sum with a locked interest rate that won’t change after closing. For anyone looking to settle existing mortgage balances, medical bills, and other major debts, the lump sum HECM may be the right solution for you. When your circumstances require a large sum to help address an immediate problem, you may find relief with the fixed-rate, lump sum HECM.
Another popular choice is the adjustable rate HECM product. This has an interest rate that may change, but it is a flexible loan, and the line of credit option embodies this versatility. If you have a line of credit, you can leave your money untouched so that it can increase in value over time. With this mortgage, you can also receive monthly tenure payments or take a lump sum. Once again demonstrating its flexibility, the adjustable rate HECM allows you to choose any combination of these disbursement methods.
Some use the money to delay social security, which allows them to collect larger social security benefits* in the future. Others simply like a growing, accessible asset that isn’t directly connected to the housing market. And some people don’t anticipate major expenses but have the line of credit available as a great way to prepare for the unexpected.
Are you thinking about moving? If you’d like to find a new home in the near future, a lump sum HECM or a line of credit may not match your goal. A HECM will come due after you no longer reside in the home, so it wouldn’t make sense to get one if you’re going to move. Some people are unaware of another product we have, the HECM for Purchase. This type of loan allows you to purchase a home without paying monthly mortgage payments.**
It may allow you to move close to your family and friends, lower your living costs during retirement, relocate to a better climate, purchase your dream home, or retreat to a smaller, more manageable home. Instead of paying typical mortgage payments, a HECM for Purchase requires you to pay a down payment – this cost is calculated as the difference between the available reverse mortgage loan proceeds and the purchase price of the new home. This option can be a convenient way to purchase a new home.
Reasons to Reconsider?
Although the reverse mortgage has provided a nifty solution for seniors across the country, this loan doesn’t fit everyone’s needs. In some cases, a regular forward mortgage may better suit your needs. Alternatively, refinancing and lowering your monthly mortgage payment may be just the right choice.
On the other hand, you could also tap into your home’s equity via the Home Equity Line of Credit (HELOC) which accesses your home equity in similar ways as a reverse mortgage. But, the HELOC does require a decent credit score as well as monthly payments – if you have substantial, consistent income, it may be a fine option.
If one spouse is significantly younger than the other, the difference in ages may affect the total proceeds available. Payments depend heavily on the youngest spouse’s age – which is done on the assumption that the younger spouse will live for a lengthier period of time. Of course, this difference may not be significant enough to postpone a potential answer to a financial issue. If you’re unsure, speaking with a financial advisor is usually a great first step.
Keep in mind that the reverse mortgage will come due if the last remaining borrower or qualified non-borrowing spouse has moved away or lived elsewhere for the majority of the year. This means that poor health may require a senior to move into a nursing home or an assisted living facility – thus causing the loan to become due and payable. If you’re already experiencing major health issues and foresee a move in the near future, you may want to reconsider the HECM.
In any case, whether you prefer a lump sum payment, a line of credit, a HECM for purchase, a traditional forward loan, a refinance, or a HELOC, be sure to analyze your financial situation and evaluate how each choice may fulfill your unique needs. Do you want an instant solution to a nagging problem? Would you prefer greater overall stability and security? Does your income allow you to comfortably continue monthly payments? No matter what, make sure to carefully weigh your options and make the best possible decision for you.
*Please consult with your financial advisor. **Homeowner is still responsible for taxes, insurance, and property maintenance.