Saving money for retirement is a decades-long commitment. It’s not uncommon for seniors to reach retirement age only to find that their retirement income isn’t large enough to support the lifestyle they want. As you enter your golden years and begin to consider various options to increase your supplemental income, home equity has the potential to be a major source of financial security.
A reverse mortgage loan or Home Equity Conversion Mortgage (HECM) allows senior homeowners to take a portion of their home’s equity and convert it into cash. The proceeds can then serve as a supplemental income for seniors during retirement. Many senior homeowners look at various options such as personal loans, refinancing, or downsizing their current home and purchasing something smaller to make ends meet prior to looking into a reverse mortgage loan, but what is the best option for you?
A personal loan is a fixed amount that an individual can apply for through a bank or lender. The amount of the loan varies and is entirely dependent on your credit rating and/or income. Personal loans can either be secured (as in, backed by collateral) or unsecured (based on the borrower’s credit history). Similar to other loans, the borrower must repay the amount borrowed plus interest.
The advantage of a personal loan is that it can provide quick access to a lump sum of cash if you qualify for it. You must have strong credit, and show you are capable of paying back the loan. If you are considered a “risky borrower,” you may not be approved or you may receive a higher interest rate.
The disadvantage of taking out a personal loan is that it can easily cost you more than the loan amount you borrowed. You will have to arrange a repayment schedule with the lender—usually with a fixed monthly payment. Over time, you will pay back the loan plus interest, which can be a sizable amount of money based on your interest rate.
Refinancing your mortgage occurs when a property owner works with a lender to replace their existing mortgage loan with a new one. This strategy is often used to consolidate debt, take advantage of better interest rates, and/or lower monthly payments. Many also use a refinance to pull money out of the home, a strategy known as a cash-out refinance. A cash-out allows you to pull existing equity from the home and adds the amount back into the mortgage balance. The homeowner can then take the funds and use them as they see fit.
Like a personal loan, a cash-out refinance gives the homeowner access to cash. Unlike a personal loan, a cash-out refinance accomplishes a full refinance of the mortgage loan, thus allowing the homeowner to benefit from lower interest rates and more manageable monthly payments.
With a cash-out refinance, you are increasing the amount owed on your mortgage. This process will give you access to cash at closing, but the amount will be added onto your current mortgage balance. As with a personal loan, you will ultimately be paying out more over time in interest. This option tacks on years of monthly payments to your mortgage.
With a traditional mortgage, you need to be pre-approved to determine how much you can afford based on your income and credit rating. You would likely need to put a down payment on a property, and your bank or lender would provide you a loan to finance the rest. You then make monthly payments on the loan, building equity in the property over time.
Often, retired seniors will decide to sell their current homes in exchange for a smaller home that will help them reduce cost. The strategy accomplishes two goals. First, the value of their home is often considerably more than that of the new home and second, the monthly mortgage payments for the new home will often be lower than they were for the first home. As a result, you can walk away from the transaction with lower monthly expenses and extra cash in your pocket from the sale of your old house.
However, having a smaller monthly payment and possibly a lower rate might not really help the situation if you look at it closely. Taking on a new traditional mortgage means moving out of your old beloved house and into a new one, and not only is moving exhausting, and the timing of buying and selling a home may be lengthy. You will need to begin building equity once more in the new home with a 15 or 30-year loan. It’s like starting from scratch.
Personal loans are a good way to access a lump sum of cash if you have a large expense to cover right now, but may ultimately cost more in the long run. The same is often true of cash-out refinancing—it can lead to higher monthly payments. Selling your home and downsizing is a smart option to consider if you have a big house that you feel you can no longer maintain, but involves more time and effort to sell and purchase a new one.
The advantage of reverse mortgages is that they are highly regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA) to ensure all borrowers are protected during their retirement years. There are strict qualifications, but if you’re eligible for a reverse mortgage, you are able to tap into your home’s equity and still remain the owner of your home.
Over the years, reverse mortgage loans have evolved to accommodate a number of borrowers. If you’re someone who is struggling to make ends meet, a reverse mortgage loan can help you supplement your cash flow, allow you stay in your home, and eliminate monthly mortgage payments. Learn more about your options by speaking to a reverse mortgage professional at (866) 753-6031.