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 (or decades) 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 example, if your house is worth $100,000 and they buy a 25% share, you’d get $25,000, minus a 3% fee, the appraisal fee and the title and filing fees. Over the years the home’s value rises, so let’s say when it’s time to sell the property is worth $200,000. When you sell, the value of their stake would now be worth $50,000. You would receive the remainder of the equity once closing costs were paid. (You pay 100% of the closing costs.)
Sounds good, but as with any financial product, you have to read the fine print: In addition to the fees, you have to settle the investment within 10 years, either by selling the property, refinancing it or simply paying off whatever equity the company holds. Your property has to qualify based on an appraisal, but unlike a reverse mortgage, it’s available to homeowners of any age.
Other financial technology companies (called “fintechs” or “proptechs”) playing in this space include Unison, which is available in 30 states and converts “up to 17.5% of your home’s value to cash” and “in return, we share in a portion of your home’s value when you decide to sell,” and Unlock Technologies, whose website says “a typical agreement might exchange 10% of the current home’s value (cash to you) for 16% of the future home’s value (the Unlock Share).” Some will be successful; others may disappear without much fanfare.
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 okay with not leaving much (if anything) to your heirs, and what options you have going forward.
If you don’t have enough cash to make your insurance and property tax payments, the smartest thing you can do is pack up your home and move to a more affordable home.
Talk with a local mortgage lender and real estate agent to find out if you have enough equity and income to refinance out of the reverse mortgage or what sort of net price you could expect if you decide to sell.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)