Reverse Mortgage Alternatives
Aside from the FHA HECM reverse mortgage, there are several common alternatives for homeowners looking for more income in retirement.
Home Equity Loan
A home equity loan or "HELOC" (Home Equity Line of Credit) is technically a second mortgage in which the lender offers the borrower a line of credit to use like a credit card. HELOC loans are appealing to many homeowners because they offer high-limit lines of credit with low, tax deductible interest rates. However, HELOCs require monthly repayments so if the borrower ever defaults on the loan they could be forced into foreclosure.
Changing Lifestyle
Sometimes the simplest way to make ends meet in retirement is to change the way you live.
- Sell your home and move into something smaller and more affordable.
- Find part-time work and save aggressively while working.
- Take on a trusted friend or relative as boarder to share in expenses.
REX Agreements and EquityKey
A REX Agreement is neither a mortgage nor a loan. It is a real estate investment agreement in the form of a purchase option. The agreement allows a homeowner to use a portion of their home's equity to convert into cash. In exchange for the cash, the homeowner allows the REX company to share in the future increase in the value of the home. The highest percentage option available is 50% (the provider would stand to gain or lose 50% of the home's future increase or decrease in value). A REX Agreement has no interest or monthly payments and will remain active until the earlier of 50 years or when the homeowner sells the home at which time the home will be appraised and the loss/gain in value will be determined.
The EquityKey is similar to the REX Agreement in that the investor offers the homeowner a lump sum payment in exchange for the right to participate in the future appreciation of the home. EquityKey gives the homeowner debt-free cash in an amount determined by the current value of the home and the projected future appreciation of the home. The cash amount is not subject to accrued interest and does not ever have to be paid back. If the home has appreciated in value once the homeowner passes away, EquityKey will purchase the home and keep 50% (for a single homeowner) to 100% (for a couple) of the appreciated value. The initial lump sum given to the homeowner remains intact regardless of appreciation or depreciation.
Proprietary (jumbo) reverse mortgage
A proprietary (jumbo) reverse mortgage is similar to the FHA HECM program except that the program cap of $417,000 is removed so properties as large as $10 million can take out a reverse mortgage for up to 30-40% of their equity. However, the interest rates are generally much higher than an FHA program.
To learn more about how the HECM reverse mortgage compares to these alternatives, talk to the experts at Coastal Finance at no cost, with no obligation.
