Is it possible to get out of a reverse mortgage?
Q: I guess it may be too late, but figured I’d ask. We did a reverse mortgage. We got almost no cash out of it, but it is eating up whatever equity remains with our loan that has an effective interest rate of almost 5%. Is there anything we can do? Thank you.
A: Reverse mortgages have been around for more than 20 years. The concept is enticing: If you’re over the age of 62 and you have equity in your home, there are a number of lenders who will give you a loan for a certain percentage of available equity (often up to 85%, but sometimes quite a bit less). The loan provides you with cash and no requirement to repay the loan until the home is sold or the owners pass away.
If you’re house rich and cash poor, and want to stay in your home but perhaps need funds to make repairs, pay off the mortgage to lower your cash burn, or even augment your retirement income, a reverse mortgage can help. But it comes at a fairly steep price: a higher interest rate plus higher fees.
The higher fees eat away at the amount of cash you’ll get. The higher interest rate eats away at your remaining equity. And, you still have the requirement to pay your real estate property taxes and homeowners insurance premiums.
It sounds like you needed cash, maybe didn’t qualify for a home equity line of credit, and turned to a reverse mortgage as a way to secure the funds you required. The problem is the one you now face: You had a home without much in the way of equity, took what you could, and now have run through the cash and are out of options to get more.
It’s an unfortunate position to be in if returning to work is no longer an option or a possibility. When we get asked about reverse mortgages, we’ll often recommend that homeowners sell the property, take whatever equity they can and rent something that’s affordable. Or, better yet, move in with family or into some sort of shared living arrangement to cut costs.
A lot of times, seniors balk at moving. It’s a lot of physical and emotional work to go through and toss years of accumulated stuff, or they simply can’t fathom the idea of fixing up the property in order to sell the home quickly. Staging a home isn’t simple, especially if the home in question hasn’t been updated in a long time, which often happens when homeowners are short of funds.
Selling, though, is still a valid option for you. And the sooner you sell your home, the more remaining equity you’ll preserve. If you live in an area of the country that has experienced rising home prices, there may be something left after you pay off the reverse mortgage company.
Or not. But at least you won’t be forced to make ongoing real estate tax and insurance premium payments.
What else could you have done? There are a number of new financial products on the market that are trying to find novel ways to allow you to tap into your equity outside of a traditional home equity line of credit (HELOC), second mortgage, or reverse mortgage.
Hometap, for example, makes an investment in the property in exchange for taking an equity stake in your home. Currently offered in 15 states, the company takes an ownership stake in the property, making a bet against the future value of your home.
This product works like a shared appreciation mortgage: You get the cash today, don’t have to repay anything and then when you sell, the company gets the value of its stake from the proceeds. If the home has gone up in value, it gets a little extra. If it goes down in value, it gets less.
For you, a few next steps: First, spend some time going through all the numbers to understand where you stand financially with the reverse mortgage. What if your financial situation is actually OK, but you’re suffering from buyer’s remorse? You need to understand what your true financial picture is, where you want it to be, if you’re really OK with not leaving much (if anything) to your heirs, and what options you have going forward.