Part I of HSH.com's reverse mortgage guide explains all aspects home equity conversion mortgages (HECMs). The initial articles in this section provide an overview of reverse mortgages, including how they work and how to get one. This article explores other options homeowners might consider.
Are there alternatives to HECM or RMs?
There may be, but most options to extract equity from your home require regular monthly payments of at least interest, if not both principal and interest. Below are six options that could be explored:
- Home equity line of credit (HELOC). This traditional product can be fine for those who are already in good fiscal straits (good credit and income strength). HELOCs should be less expensive to get into than reverse mortgages, but will require payments on any funds borrowed. If you can manage payments, this might be a way for you to be able to cover a one-time expense (such as a roof replacement) or even a recurring one, such as a quarterly tax bill. In this way, you won't need to tap other assets to raise funds to cover immediate expenses, instead paying them down over time through your regular income flow.
- Lump-sum home equity loan. Although likely a little more expensive to get into than a home equity line of credit, a lump-sum home equity loan can be a way to handle a one-time need for cash. As with the home equity line of credit, this allows you to take less of an immediate hit to your assets, trading that off for what might be a more manageable cost spread over a longer term.
- Loan within a line of credit. Many lenders offer a "loan within a line of credit," which enables you to use a portion of funds available through a line of credit and "break off" this debt into a fixed payment term, usually with a fixed interest rate. As you pay down the debt, your line of credit replenishes, and you again can use those funds as needed.
- Private appreciation-sharing mortgages. Private individuals may provide funds in exchange for giving up some (or all) of your rights to any future price appreciation of your property. Currently rare in the United States, these "shared appreciation" or "equity participation" mortgages were fully private, non-standardized offerings, and required a lot more due diligence on the part of the homeowner to ensure that the deal will provide value to them over the long haul.
- Family loan. If your family is willing, it might be possible for them to set you up with a private loan or line of credit to tap your equity. You might consider using a service such as National Family Mortgage to set up your deal, so all parties can have clear documentation and expectations about how the loan or line of credit will be structured.
- Cash-out refinance. This method will require monthly payments, so you'll also need to qualify to borrow. However, if you have a pile of assets, these can be counted as income though an actuarial approach engineered by Fannie Mae and Freddie Mac. Simply put, these mortgages use 70 percent of the value of a qualifying asset (such as an IRA, 401K or other asset), subtract what will be needed to cover any closing costs, and divide the remaining amount by 360 (the number of months in a standard loan) to arrive at a dollar amount that is considered equivalent to monthly income. In turn, this is added to any other regular income stream, determines the monthly payment you can qualify for, and ultimately, how much you can borrow.
Any loan besides the HECM or RM (and possibly any shared-appreciation offer) will have monthly payments you'll need to make.
Still interested in a reverse mortgage? Part 2 of this guide delves into financing details such as borrowing limits, credit rating impact and more.
Next: Reverse mortgage borrowing limits
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