If you’re over the age of 62, then you’ve probably been contacted about obtaining a reverse mortgage loan. In the most general of definitions, this is when you convert the equity within your home to cash. By borrowing against your developed equity, you’re able to obtain a fixed monthly payment or a large line of credit. Repayment of such loans is typically deferred until you sell your home, move out or you pass away. Upon this, the house is sold and after repayment of the loan the rest of the value is transferred either to you or your designated heirs.
While this may seem like an excellent option for many elderly homeowners, if the process isn’t handled correctly there can be a host of problems. Even though this may seem like the best option for many homeowners, there are several alternatives to the traditional reverse mortgage loan. Of course, the final decision is based upon your unique situation. You should always discuss this option with a financial planner to determine which option is safest for you and your family.
Alternative #1 – Existing Mortgage Refinancing
If you already have an active mortgage, you may free up some cash by refinancing your mortgage for a lower interest rate. The most common reason for doing this is to save you money over the life of your loan by decreasing your monthly payments and reducing the amount of money you spend on interest rates. Perhaps the greatest benefit of refinancing your existing mortgage loan is your home remains as a serious asset to your family.
Alternative #2 – Home Equity Loans
Essentially, a home equity loan is a referred to as a second mortgage. This type of financial lending allows you to borrow money by leveraging the amount of equity you’ve built into your home. The process is the same as a traditional mortgage. Upon acceptance, you receive a lump sum of cash, which can be used as you see fit. Another benefit is the interest you pay in an home equity loan is typically tax deductible up to $100,000.
Alternative #3 – Home Equity Line of Credit
By taking out a home equity line of credit, also referred to as HELOC, you’re actually able to borrow up to your approved credit limit whenever you need it. This differs from home equity loan, as you’re only paying interest on the amount of money you withdraw. These adjustable loans mean your monthly payments will fluctuate with the market, which can be an issue for those who are living on a strict monthly budget. The biggest downside of this type of loan is the risk you run if you fail to make payments. If you default on your loan, your home can be foreclosed upon.