Comparing a Home Equity Loan and a Reverse Mortgage

Which is best for you - a home equity loan or a reverse mortgage? They both provide money for you now. They both use the equity in your home as the source for the funds. So what are the differences?

Home Equity Loan
The loan fees are normally lower for a home equity loan than for a reverse mortgage and the interest paid is most often tax-deductible. It is also highly likely that you'll qualify for a higher loan amount. You will need to start making monthly payments immediately with the goal of paying the amount back to the bank. This type of loan is often used if you plan to move in the near future or when there is a need to access funds short-term. If you default on a home equity loan, you could default and lose your home.

Reverse Mortgage
A reverse mortgage is basically that - reverse, or opposite, from a standard loan. Your debt balance increases over time while you decrease your equity and create a potentially lower value of our estate. Typically the closing costs for a reverse mortgage are higher than that of a home equity loan, and interest percentage is usually higher as well. There are no monthly payments required, because the loan is paid off after your death. Therefore, you do not face defaulting on the loan or losing your home.

These are the major differences between the two opportunities to use the equity in your home to provide funds. Discuss your situation with your financial advisor and a reverse mortgage specialist so you can make the proper decision that best meets your needs.

Reverse Mortgage Payment Options

Over the series of posts regarding reverse mortages, we've been discussing some of the benefits of this special program designed especially for seniors. This loan accesses the equity in your homes to help fund a variety of expenses that your income sources might not be able to cover.

One question regarding reverse mortgages that we are often asked is, "How do I access the funds?" Following are brief descriptions of the options from which you can choose. For more information, discuss them with a reverse mortgage specialist.

• A single lump sum.
• A regular monthly payment.
• Set up a credit line. This allows for a customized plan which can change as your needs change. You can choose when and how much money you receive each month.
• A combination of the payment methods listed above.

Whatever your needs now, or down the road, it's obvious that the reverse mortgage program is flexible and will serve a variety of lifestyle scenarios.

Funding a Life Insurance Policy with a Reverse Mortgage

If you have a large amount of equity in your home, it might be a good choice to use a reverse mortgage to fund your life insurance policy. This would give you control over - and help retain the value of - your estate for the benefit of your heirs.

 

A few key points:

• You would lower the total value of your estate that would be subject to taxes. This is because the full value of your home is subject to estate tax; a reverse mortgage will reduce the value. Thus, the estate tax due will be lower. Additionally, if your heirs are the beneficiaries, they will receive the life insurance payout in tax-free dollars.
• Your heirs will be ensured a guaranteed sum upon your death. When using funds obtained by your reverse mortgage to purchase a life insurance policy, you will know exactly what you are able to leave behind for them.
• Upon your death, when your home is sold, the equity that exceeds the loan amount will be subject to taxes. However, the remainder will go to your heirs.
• When you use the funds obtained from a reverse mortgage to pay for additional life insurance premiums, that purchase will be made with tax-free dollars, which means a larger death benefit.

If you have equity in your home, and you want to visit these options, meet with a reverse mortgage specialist to determine if this is the best option for you to have control over your estate plan.

Medical Needs Can Be Met with a Reverse Mortgage

Many seniors need financial assistance to meet their medical expenses and health care payments, and a reverse mortgage could be a good option.
Close to half of all seniors over the age of 65 are in need or will need long term health care, and most don't have long term care insurance. This will be a financial burden because neither Medicare nor Medicare Supplemental Insurance will cover the costs of these needed services, whether in your own residence or in any type of nursing facility.

A great number of financial and retirement planners suggest that their clients consider a reverse mortgage to completely fund or at least help fund the cost of medical costs and/or long term care insurance premiums. Using the equity in your home via a reverse mortgage to pay for these costs can serve as a way to protect your assets for your heirs.

Be sure to talk to your financial planner and a reverse mortgage specialist to determine if this is the right choice for you.

The 3 big IFs

My last post discussed the advantages of a reverse mortgage. As with most things in life, there are also some disadvantages. Consider these 3 "ifs" before making a decision:

If you are eligible for low income assistance or will be soon, be sure that your income from the loan doesn't disqualify your from receiving Social Security, Medicare or other similar State or Federal programs.

If you are planning to move soon, your home will no longer be your primary residence. This is a requirement for a reverse mortgage. Therefore, since closing costs are typically higher than for other loans, this will most likely not be the best short-term loan.

If you are unsure about reducing your home equity, you might want to discuss this with your heirs. Many people want to leave their home to their heirs, and a reverse mortgage decreases your home equity. This, in turn, reduces the value of your estate. However, even with this loan against your home, you can still will your home to whomever you choose. They will have the choice of whether to keep the home or sell it.

Now that you have the pros and cons, you will be able to consider this option with more clarity and understanding. Feel free to contact us with your questions. Our Reverse Mortgage Specialist can discuss your specific situation and assist you.

The top 5 advantages of a reverse mortgage

You've worked hard your entire life, and now you're thinking about retirement - or might already be retired. Seniors often face a need for additional cash flow that is greater than their pensions or 401(k) plans. Some worked hard their entire life, and now want to play just as hard. Some are facing high medical costs, or the need to purchase additional health and long-term care insurance. Where do you turn to serve any - or all - of these scenarios? Many are finding that the equity in their homes is a means to finance their needs.

The five main advantages of a reverse mortgage are:

1. Extreme Flexibility: There are few, if any, restrictions on how and where you spend the money you received from your loan. You can purchase long term care insurance, help pay for grandchildrens' college or even travel - it's your money, and your choice.
2. Easy Prequalification: You don't have to fall within a specific income range to qualify for a reverse mortgage.
3. No Downside: You will never owe more than the value of your home at the time the loan is repaid - even if the mortgage lender paid you more than that. This means that if your home declines in value, you will not owe more than what it is worth.
4. Home Ownership: You live in your home for as long as you want; you are guaranteed a place to live.
5. Federally Insured: The Home Equity Conversion Mortgages (HECM) is managed by the Department of Housing and Urban Affairs and is federally insured. This means that if your lender defaults, you won't be affected and will continue to receive your payments.

Our next post will cover the disadvantages that come with a reverse mortgage. Then you'll be more prepared to discuss this loan option for yourself, or to provide this information to your adult parents. Grandview Lending has a Reverse Mortgage Specialist ready to help you with this decision.

Downsize by purchasing with a reverse mortgage

Our previous post discussed buying a dream home with a reverse mortgage. Many seniors, rather than wanting a dream house, are more interested in finding a smaller, one-story home that is easier to maneuver and live more comfortably and safely. A reverse mortgage might be just the answer for downsizing as well! And at the same time, you could also eliminate the monthly payments you might now must pay with a regular mortgage.

If you choose to use a Home Equity Conversion Mortgage (HECM) for this purchase, you can eliminate your monthly mortgage payments. This can be accomplished by generating the funds from the sale of your current home to pay for the larger down payment that is required by the HECM for Purchase transaction.
This all sounds great, but there are some drawbacks when using a reverse mortgage to purchase a new home:

• A large down payment is required (depending on age and property value, as much as 50% of the new home's value).
• The down payment must meet the loan to value ratio.
• You may not have other loans against your home (2nd mortgage, home equity).
• Possibly affect needs-based Medicaid and other programs.
• Recommended only if you plan to stay in this house more than 5 years.

Before choosing this funding option, be sure to discuss it with your financial planner and estate planner as well as your family. And once the decision is made, contact a reputable, trustworthy mortgage broker to assist you.