When should I remortgage?

Remortgaging is when you get a new mortgage on your current home. It’s a very important decision that could impact your finances by thousands of pounds every year.

Why should I remortgage?

Before you look at the when, you need to first consider the why. Why should you remortgage if you can afford the monthly repayments, are happy with your lender and are not planning to move house?

We go into this in detail in our Should I remortgage? guide, but in brief:

1. Your current deal is about to end/has already ended (which most likely means you’ll be on your lender’s costly standard variable rate, known as SVR)
2. You want to save money
3. You want to release some of the equity in your home to make changes to it, like renovations or an extension
4. You want to pay off your mortgage earlier
5. The value of your property has gone up significantly
6. You want to switch from an interest-only to a repayment mortgage
7. Economic uncertainty

When should I remortgage?

In general, you should start looking for a new mortgage around three months before the end of your current mortgage’s promotional deal. For example, if you have a three-year fixed rate mortgage, you should start shopping around when you’re 33 months into the 36-month promotional period.

When a lender offers you a mortgage, you usually have between three and six months to accept it – after that, you’ll have to reapply. That’s why you should start looking for a new mortgage when your current mortgage deal has around three months to go.

If you don’t find a new deal, you’ll automatically revert onto your lender’s SVR when your promotional period ends, which is often far more expensive than if you’d shopped around for a new fixed rate or discount rate mortgage. In fact, mortgage broker London & Country recently discovered that a third of mortgage customers are on their lender’s SVR.

According to financial data site Moneyfacts, the average two-year fixed rate mortgage in the UK is around 2.52% compared to the average SVR which is 4.9%. Using these figures as examples, if you had a £300,000 repayment mortgage over a 25 year term, your monthly payments would go from £1,349 to £1,736 – that’s an increase of almost £400 each month, or £4,800 per year.

Of course, with Brexit looming the economy is currently somewhat unpredictable, so it could be beneficial to see what mortgage deals are out there even if yours isn’t coming to an end. But don’t forget to look at all the costs because early repayment charges (to leave your mortgage before it ends) and set-up or arrangement fees (payable when you’re setting up a new mortgage) could cancel out the financial benefit of getting a new, low fixed-rate offer.

This need for security is made clear by the fact there has recently been an increase in popularity for longer-term fixes, like five and 10 years as opposed to just two or three. Plus, the similarity between the two-year (2.52%) and five-year (2.93%) rates shows how lenders are reacting to this shift from borrowers and how hard they are trying to remain competitive.

Mortgage analytics specialist at Moneyfacts, Darren Cook, says: “We have seen the margin between the average two-year fixed and five-year fixed rates narrow as competition gathers pace in the five-year fixed rate landscape. Historically, competition on rates has been strong in the two-year fixed rate market and it seems that rates in this sector have been cut to a bare minimum and the five-year fixed rate sector is the next option for mortgage providers to compete in, causing rates to fall.”

Fixing your mortgage for longer not only means you have prolonged certainty when it comes to your payments, but it also means you will not need to think about changing your mortgage for longer periods of time. However, if you’re unsure whether or not you’ll remain in your current property for the length of the new mortgage deal, make sure it has the added bonus of being portable, which means you can take it from one property to another without (or with minimal) fees.

How to get the best remortgage deals

When it comes to remortgaging, your loan to value (LTV) is primarily based on the amount of equity in your home – plus, if you have some savings put aside, you can put those into the new mortgage deal as well.

Much in the same way that a larger deposit gives you access to better mortgage rates on your first home, more equity equates to lower interest rates. If you have a repayment mortgage, and the value of your home has stayed the same or gone up, you should have a decent chunk of equity in your home.

For example: you originally bought a £200,000 property with a £20,000 deposit – i.e. you borrowed £180,000 at an LTV of 90%. Since then, your property has increased in value to £250,000. You’ve also paid off £10,000 of your mortgage debt through your monthly repayments, so you only owe the lender £170,000. This means your total equity in your home is now £80,000: £20,000 from the deposit, plus £10,000 in debt repayments, and a final £50,000 from the increase in property value.

With £80,000 in equity on a £250,000 home, and only £170,000 left to repay, you’re in a very strong position for remortgaging. You will have an LTV of 68%, which will give you access to some of the best mortgage rates. If you contributed another £7,500 – from a savings account, perhaps – then your LTV would move down to 65%, where you likely get an even better mortgage rate!

Why can’t I remortgage?

If the value of your property has dipped below your outstanding mortgage debt, you’ll have what’s known as negative equity. For instance: In 2017, you bought a house for £300,000 with a £270,000 mortgage on a two-year fixed-rate deal. The deal is coming to an end, but the property has decreased in value to £250,000.

Most lenders will not allow you change mortgages while you’re in negative equity, so you could end up paying its costly SVR until the property goes up in value.

One way to partially remedy this in the interim is to overpay your mortgage, that is, make payments over the monthly requirements. Generally speaking, this should be doable if you’re already on the lender’s SVR (higher rates usually mean greater flexibility) – but if you’re in negative equity whilst on a fixed-rate deal, you must check the terms and conditions before you overpay. Although most fixed-rate deals allow you to overpay by 10% per year, they’ll charge you a penalty for anything over that.

Try to remortgage to a cheaper deal as soon as you’re out of negative equity.

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Last updated: 28 April, 2019

Bridge Loans Ease The Transition Between Homes - At A Cost

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They can save the day for homebuyers in a pinch, but people looking for a “bridge loan” to span the gap between the sale of an old home and the purchase of a new one should ask if the cost is worth it.

Experts say it almost never is, and people would be better off staying put until they’ve unloaded their first residence. If that’s impossible, they warn, be prepared to shoulder a heavy burden.

“There are many sad stories about homeowners who took bridge loans, and our best advice would be, ‘Don’t do it,'” says Richard Roll, president of the American Homeowners Association in Stamford, Connecticut. “You can find yourself in a totally untenable position, and you can lose your first house.”

What is a bridge loan?

A bridge loan is a short-term loan designed to provide financing during a transitionary period – as in moving from one house to another. Homeowners faced with sudden transitions, such as having to relocate for work, might prefer bridge loans to more traditional mortgages.

Bridge loans aren’t a substitute for a mortgage. They’re typically used to purchase a new home before selling your current home. Each loan is short-term, designed to be repaid within 6 months to three years. And like mortgages, home equity loans, and HELOCs, bridge loans are secured by your current home as collateral.

Terms can vary widely

A tool used by movers in a bind, bridge loans vary widely in their terms, costs and conditions. Some are structured so they completely pay off the old home’s first mortgage at the bridge loan’s closing, while others pile the new debt on top of the old. Borrowers also may encounter loans that deal differently with interest. Some carry monthly payments, while others require either upfront or end-of-the-term lump-sum interest payments.

Most share a handful of general characteristics, though. They usually run for six-month terms and are secured by the borrower’s old home. A lender also seldom extends a bridge loan unless the borrower agrees to finance the new home’s mortgage with the same institution. As for rates, they accrue interest at anywhere from the prime rate to prime plus 2 percent.

One Norwest Corp. bridge loan, for example, would total $70,000 on a customer’s old $100,000 home with $50,000 in mortgage debt outstanding, says Patty Stubbs, branch operations supervisor for the company’s Des Moines, Iowa, mortgage division. Of that, $50,000 would go toward the old house’s lien and a few thousand would cover the bridge loan’s closing costs, origination charges and fees, leaving the customer with about $16,000 for the new home’s down payment, closing costs and fees.

This example helps to show how the high fees associated with bridge loans can cause problems. Norwest’s customer, for example, would end up paying between $2,000 and $3,000 for closing on the bridge loan, 1.5 percent to 2 percent of its value for an origination fee, and another couple thousand dollars for closing on the new home’s mortgage.

What if the sale goes sour?

Real estate market risks can exacerbate the danger, Roll says. For example, Norwest and others are usually willing to extend bridge loans slightly beyond the standard six months. But what happens to a homeowner who gets the financing and extension, so the old home’s buyer can have a little more time, only to see the transaction fall through?

“Let’s say they need some of that money to buy their new house, so it’s predicated on selling their old house,” Roll says. “What happens if they don’t sell that house, or if the buyer doesn’t get financing?”

In such a case, the lender could go as far as to foreclose on the old property after the bridge loan extensions expired, Stubbs says, or a customer could deed the property to the bank, which would sell it and apply the proceeds toward paying off the loan.

Consider other options

For those trying to stay away from bridge financing, borrowing against a 401(k) plan or taking out loans secured by stocks, bonds or other assets are options, says Kevin Hughes, a mortgage loan specialist at Cambridgeport Bank, based in Cambridge, Massachusetts. Some lenders also offer hybrid mortgage products that behave similarly to bridge loans.

For example, a Cambridgeport customer with $50,000 equity on a $100,000 home, for example, could obtain a combination first and second mortgage on a second $100,000 home, Hughes says. Only one set of closing costs of about $1,300 would be required, with about $184 in additional costs for the second mortgage.

As part of the bank’s program, that person would make a $10,000 down payment on the new property, which would have both a first mortgage for $50,000 and a second for $40,000. Upon selling the old home, the borrower could use the $50,000 worth of equity to simultaneously pay off the new home’s second mortgage and recoup the money that covered the down payment.

Bridge loans vs. home equity loans

Home equity loans are one of the most popular alternatives to bridge loans. Like a bridge loan, they are secured loans using your current home as collateral. But that’s where the similarities end.

Home equity loans borrow against available equity in your home. They are usually long-term loans, and repayment periods can be anywhere from 5 to 20 years. If you qualify, interest rates tend to be more favorable with home equity loans than with bridge loans.

But using a home equity loan to finance part of a new home purchase, such as the down payment, can still be risky. If your original home fails to sell, you may find yourself paying three loans: your original mortgage, your new mortgage, and the home equity loan. We still recommend waiting until a deal closes on your original property. But if you’ve built up sufficient equity in your current home, a home equity loan may be a solid alternative to bridge loans.

Compare home equity loan rates in your area

Total debt climbs

Whether a homeowner takes a bridge loan or a hybrid stand-in, however, a significant amount of new debt will end up being added to the pile. The Cambridgeport borrower, for instance, would have to make three payments each month in order to cover the old home’s mortgage, and the first and second mortgages on the new house.

But even though they aren’t the best deal, bridge loans or other short-term mortgage financing products may be necessary when homebuyers land in tight spots, lenders say. There will always be people relocating for work without much advance notice, trying to keep others from beating them to the punch on a property, or needing help with the expensive upfront costs of buying a new home before their old one sells.

“It’s a way for the customer to get into that home without having to go through all the gyrations of trying to get cash for a down payment,” says John Bollman, a mortgage product manager with National City Corp. in Dayton, Ohio. “The Realtors tend to use it as a tool to help buyers buy their home.”

Bridge loans nevertheless remain relatively obscure in a lending landscape dominated by more widely publicized home equity loans and lines of credit. A fast-churning real estate market also eases the demand because it shortens the amount of time it takes for people to sell their homes, Hughes says.

Norwest, for instance, said only 140 of the 240,122 mortgage loans it extended last year were bridge loans, while Continental Savings Bank, based in Seattle, closes just four bridge loans a month on average out of 775 total mortgages.

How To Use Home Equity To Consolidate Your Debt

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If you feel like you’re struggling with debt, you’re not alone.

The average amount of non-mortgage household debt in the U.S. reached $24,706 in 2017, according to Experian’s State of Credit Report. The good news is that home equity interest rates are still near historic lows. Assuming you have enough equity in your home, this avenue of debt consolidation could be a better and cheaper alternative to carrying high-interest debt.

“It’s generally a good option to pay down credit card debts or personal loans, assuming it’s done responsibly,” says Andrew Weinberg, principal at Silver Fin Capital Mortgage in Great Neck, New York. “It can save a lot of money.”

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There are two ways to access home equity – a home equity loan or a home equity line of credit, or HELOC. A home equity loan offers a one-time lump sum payment of funds taken as a second mortgage on your home. A home equity line of credit is a revolving line of credit that enables you to withdraw money over time as you need it and pay back the loan as you can.

Your home’s equity is its current value minus the loan balance you still owe. Tapping too much of your equity is risky, and you could wind up underwater in your mortgage if market conditions turn. This means you might owe more on the house than it’s worth, making it difficult for you to move without putting up cash to make up the difference.

“The value of a house goes up and can go down. As a general rule, I would never recommend anyone borrow more than 80 percent of their home’s value,” says Mike Zovistoski, managing director at UHY Advisors.

Pros of using home equity to consolidate debt

Whether you use a home equity loan or HELOC, tapping your home equity to consolidate debt can offer several advantages:

1. You’ll have just one payment

If you’re juggling car loans, a personal loan, medical bills and credit card debt, you already know how challenging it can be to keep track of due dates. By consolidating your debt, you may be able to combine it all to one single payment per month, simplifying your bills and reducing the chance of missed payments.

2. You’ll know when your debt will be paid off

Assuming you don’t keep using your cards, using a home equity loan or HELOC to consolidate debt streamlines the process of paying those accounts off. With a home equity loan product, you’ll have set repayment terms and know the exact date when the loan will be repaid.

3. You can get a lower interest rate

Because the debt is secured against your property, home equity loans and HELOCs have significantly lower interest rates than credit cards. The average variable credit card interest rate was 17.87 percent as of late April, according to Bankrate data. Meanwhile, the average rate of a home equity loan was 5.9 percent and 6.75 percent on a $30,000 HELOC.

A home equity loan also enables you to lock in an interest rate, unlike a credit card that can increase at any time. Additionally, with a home equity loan, more of your monthly payment goes toward the principal rather than the interest.

“It’s almost always going to be a better deal than the rates you’ll pay on credit cards,” Weinberg says of home equity products.

4. You can save money

The ability to lock in a lower rate not only saves money in the long term, but can also equate to a lower monthly payment and help you pay down the debt faster.

For example, if you had $10,000 in credit card debt at a 16 percent interest rate, you’d pay $243 per month and more than $4,591 in interest by the time you pay it off. Consolidating that debt with a five-year home equity loan would not only allow you to pay off the debt faster, but also reduce your monthly payments to $193 and save $3,391 in interest.

“If the borrower is able to continue making the same monthly payment amounts that were originally scheduled on the high-cost debt, they would be able to repay the debt over a shorter period of time and save money,” Zovistoski says.

Use a home equity debt consolidation calculator to find out how much you could save.

Cons of using home equity to consolidate debt

While a home equity loan or HELOC can be a good way to consolidate and better manage debt, it comes with several risks and downsides:

1. It takes time

Unlike opening a credit card or filling out an application for a personal loan, applying for a home equity loan or HELOC is a more in-depth process. The bank will typically want an appraisal of your home along with two years of tax returns, W-2s and bank statements. It can typically take up to 30 days or more to close on a home equity loan or HELOC and get access to the money.

2. Your house is the collateral

HELOCs and home equity loans are forms of secured debt that use your home as collateral. This enables lenders to offer much lower interest rates and more favorable terms than credit card companies, but it presents a greater risk: losing your home if you fail to repay the loan.

While credit card companies and personal lenders can’t come after your home, a bank could foreclose on your home if you default on a HELOC or home equity loan. In other words, don’t take out a HELOC or home equity loan unless you can comfortably afford the payments, in addition to your normal monthly mortgage payment, Zovistoski says.

3. Lender fees and closing costs

Depending on the lender you choose, you’ll likely face some charges such as closing costs and appraisal fees, all of which can add to the cost of the loan. When shopping for a lender, make sure you understand the closing costs that each lender charges and how it will affect overall borrowing costs. Some may claim to offer no fees, then add them back in later as penalties if you close the account before the term ends, Weinberg says.

4. You may fall back into debt

One of the greatest risks is that you may use home equity to pay off your credit card debts only to run those same cards up again. People who have a history of debt problems can be susceptible to falling into the hole again. It’s not an uncommon scenario, Weinberg says.

“They may come back in a couple of years and be back where they were with more credit card debt,” Weinberg says. “You can only do it so many times before you run out of equity.”

5. Tax deductibility is restricted

Under previous tax laws you could deduct the interest you paid on a home equity loan or HELOC, regardless of its use. The new tax law now restricts the mortgage interest deduction on home equity loans or HELOCs to use the money to buy, build or renovate the home you’re borrowing against. Even so, the significant savings in interest rates on home equity products compared to credit card rates still make home equity borrowing a worthwhile option.

Other alternatives for consolidating debt

Tapping home equity may not be the best option for people with serious debt and credit problems. If that’s the case, or if you don’t have enough equity in your home, debt relief programs may be a better option.

One avenue is to work with a certified, non-profit credit counseling agency on a debt management plan. It won’t hurt your credit score but will require you to close all your accounts included in the plan. You’ll have to make monthly payments to the agency which in turn then makes the payments to your creditors. If you have debts with multiple credit cards or lenders, you’ll be saved the hassle of tracking multiple bills and due dates.

Another option is a debt settlement plan. While you’ll be able to reduce the balance by agreeing to settle with one or more creditors for less than what you owe, your credit score will suffer significantly. You’ll also have to pay fees and income taxes on the amount forgiven, a consideration that could make debt management less attractive.

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Bottom line

It’s a smart idea to shop around with several different home equity lenders to ensure you get the best rates and terms. Having a plan for how you’ll attack high-interest debt — and how you’ll repay your home equity loan or HELOC — can set up your finances for a more secure future.

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Refinancing your HELOC into a Home Equity Loan

HELOC payments tend to get more expensive over time. There are two reasons for this: adjustable rates and entering the repayment phase of the loan.

HELOCs are variable rate loans, which means your interest rate will adjust periodically. In a rising-rate environment, this could mean larger monthly payments.

Additionally, once the draw period ends borrowers are responsible for both the principal and interest. This steep rise in the monthly HELOC payment can be a shock to borrowers who were making interest-only payments for the first 10 or 15 years. Sometimes the new HELOC payment can double or even triple what the borrower was paying for the last decade.

To save money, borrowers can refinance their HELOC. Here we’ll take a look at two options and how they work.

Home equity loan

You can take out a home equity loan, which has a fixed rate, and use this new loan to pay off the HELOC. The advantage of doing this is that you could dodge those rate adjustments. The disadvantage is that you would be responsible for paying closing costs.

New HELOC

Apply for a new HELOC to replace the old one. This allows you to avoid that principal and interest payment while keeping your line of credit open. If you have improved your credit since you got the first HELOC, you might even qualify for a lower interest rate.

If you’re interested in refinancing with a HELOC or home equity loan, use Bankrate’s home equity loan rates table to see current rates.

Home equity loans vs. HELOCs

Home equity loans and home equity lines of credit, or HELOCs, are two types of loans that use the value of your house as collateral. They’re both considered second mortgages.

The main difference between them is that with home equity loans you get one lump sum of money whereas HELOCs are lines of credit which you can draw from as needed.

Paying off a home equity loan

The faster pay off your loan, the less interest you’ll pay. You might even be able to reduce your interest rate by refinancing your loan to a shorter term. Often, lenders will reward shorter terms with lower interest rates, so it’s worth investigating if you want to pay off your loan faster.

Before you get the loan, find out if there’s a penalty for paying it off early. If there is a penalty, factor that amount into your calculations.

You should also note any balloon payments that are included in your contract. These are large lump sums owed at the end of your home equity loan term. Some loans are not amortized, which means you could end up making interest-only monthly payments only to have the full principal balance due on a specific date.

This could mean trouble for homeowners who haven’t prepared. If your loan has a balloon payment, set aside enough money each month to make that payment when it comes due.

Paying off a HELOC

HELOCs are different from home equity loans in that they function more like a credit card. Your lender will extend credit, based on several factors including your credit history and the equity in your house. You only owe what you borrow. For example, if you’re extended $50,000 and use just $25,000, then you only owe $25,000.

Many HELOCs allow borrowers to make interest only payments during the draw period, which can vary. Normally, draw periods last between 10 and 15 years. When that period ends, you must make principal and interest payments.

HELOCs can become a drain on your finances if you put off making payments on the principal. If possible, make extra monthly payments on your principal. Like home equity loans, find out if there are prepayment penalties.

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Everything you need to know about reverse mortgages

While most traditional mortgages let borrowers access funds to purchase a home, one type of mortgage works in the exact opposite way. With a reverse mortgage, the homeowner withdraws a portion of the equity available in a home they already own.

The most popular type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the federal government. HECM products are only offered by FHA-approved lenders, although they are widely available.

Reverse mortgages are only available to consumers ages 62 and older. This loan product is aimed at consumers who own their homes outright — or at least have a considerable amount of equity to draw from.

You may be wondering why anyone would want to borrow against a home they worked hard to pay off. Why not remain in your home and live there debt-free?

According to Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association (NRMLA), nobody gets up in the morning and thinks about getting a reverse mortgage.

“Instead, they think how they are going to pay for healthcare, fix the roof, pay the property taxes or have enough money to outlive their retirement,” he says. “A reverse mortgage provides solutions to these issues and many others, so that people can live more financially secure lives as they age.”

Who is eligible for a reverse mortgage?

If you’re wondering whether a reverse mortgage might work for your situation, it’s important to understand how you can qualify. We already talked about the age requirement, and the fact that you must be age 62 or older to apply. However, Irwin says that if one spouse is under 62, you may still be able to get a reverse mortgage if you meet other eligibility criteria. For example:

• You must own your home outright or have a single primary lean you hope to borrow against.
• Any existing mortgage you have must be paid off using the proceeds from your reverse mortgage.
• You must live in the home as your primary residence.
• You must remain current on property taxes, homeowner’s insurance and other mandatory obligations such as homeowners association dues.
• You must maintain your property and keep it in good working condition.
• Your home must be a single-family home, a multi-unit property with up to four units, a manufactured home built after June 1976, a condominium, or a townhouse. Irwin says co-ops do not qualify.

How does a reverse mortgage work?

Before you sign on the dotted line for a reverse mortgage, it’s crucial to know how they work and what to expect. For starters, keep in mind that you may not be able to borrow the full value of your home — even if it’s paid off. The amount you can withdraw varies based on the age of the youngest borrower or eligible non-borrowing spouse, prevailing interest rates and the lesser of the appraised value of your home, the HECM FHA mortgage limit ($726,525 in 2019), or the sales price.

Not only does the amount you can borrow vary, but so do your options for how to accept your funds. If you choose a HECM with a fixed interest rate, you will receive a single disbursement lump sum payment. If you opt for a reverse mortgage with a variable rate, on the other hand, you can choose to accept:

• Equal monthly payments provided at least one borrower lives in the property as their primary residence
• Equal monthly payments for a fixed period of months agreed on ahead of time
• A line of credit that can be accessed until it is exhausted
• A combination of a line of credit and fixed monthly payments for as long as you live in the home
• A combination of a line of credit plus fixed monthly payments for a set length of time

The money you borrow via a reverse mortgage doesn’t need to be repaid until the borrower dies, moves out, or leaves the home for any reason. Further, the borrower will never owe more than the home is worth regardless of how much they borrow or what happens to their property values over time. And if the balance is less than your home’s value at the time of repayment, you or your heirs keep the difference.

Reverse mortgages — what are the pros and cons?

Borrowing against your home equity to free up cash for living expenses can seem like a good deal once you retire, but there are advantages and disadvantages with this type of loan. Here are the main details to keep in mind:

Pros

• Borrower does not need to make monthly payments toward their loan balance
• Proceeds can be used for living expenses, debt repayment, healthcare expenses, and more
• Funds can help borrowers enjoy their retirement
• Non-borrowing spouses not listed on the mortgage can remain in the home after the borrower dies

Cons

• Borrower must maintain the house and pay property taxes and homeowners insurance
• A reverse mortgage forces you to borrow against the equity in your home, which could be a key source of wealth
• Fees and other closing costs can be high

How much does a reverse mortgage cost?

Speaking of higher costs, it’s important to understand that closing costs for reverse mortgages tend to be significant. Most HECM mortgages let you finance closing costs into the new loan, however, meaning you won’t have to fork over the money out-of-pocket.

Here’s a breakdown of HECM fees and charges, according to HUD:

Mortgage Insurance Premium (MIP). You’ll pay a 2 percent initial MIP at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. MIP can be financed into the loan.

Origination fee. Lenders charge the greater of $2,500 or 2 percent of the first $200,000 of your home’s value to process your HECM loan, plus 1 percent of the amount over $200,000. The FHA caps HECM origination fees at $6,000.

Servicing fee. Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan. Monthly servicing fees cannot exceed $30 for loans with a fixed rate or an annually adjusting rate, or $35 if the interest rate adjusts monthly.

Third-party charges. Third parties charge their own fees for closing costs, such as the appraisal, title search and insurance, inspections, recording fees and mortgage taxes.

Also keep in mind that the interest rate for reverse mortgages tends to be higher than that of a traditional home loan. Of course, rates can vary depending on your lender, your home value, your creditworthiness, and other factors.

Reverse mortgages vs. home equity loans

If you’re not yet 62 or older but still want to tap into your home equity, you may want to consider a home equity loan or home equity line of credit (HELOC) instead. Both loan products will let you borrow against the equity you have in your home, although you can typically only borrow up to 85 percent of your home’s value including your original mortgage if you have one.

However, it’s important to understand the differences you’ll find with a home equity product.

“The main difference between a reverse mortgage, a home equity loan, and a HELOC is that the homeowner doesn’t need to make monthly payments with a reverse mortgage,” said Irwin. Plus, any funds borrowed from the reverse mortgage don’t need to be repaid until the borrower passes away or permanently vacates the property.

With a home equity loan or HELOC, the borrower does have to make monthly payments until the loan is paid off. Home equity loans can also be more difficult — or impossible — for retirees to qualify for since lenders expect you to have an income to repay your loan.

On the flip side, home equity loans and HELOCs don’t require you to be at least 62 years old to apply. Fees and interest rates for both can also be significantly lower than what you’ll qualify find with a reverse mortgage.

The bottom line

Nobody wants to have to borrow money just to get by, but reverse mortgages do serve an important purpose. For the most part, they are intended to help consumers cover living expenses without having to move in old age. For those struggling to pay for healthcare, food or experiences as they enjoy their golden years, a reverse mortgage can be a game-changer.

Then again, they’re not for everyone. A reverse mortgage isn’t a good option if you can’t keep up with the costs associated with the home, even without a monthly mortgage payment.

If you die or the home is no longer the primary residence for more than 12 months, the loan comes due, which means either you or your estate has to repay the loan or put the home up for sale to settle it.

Another potential drawback: if the loan balance exceeds the home’s value, you or your heirs may need to sign a deed-in-lieu of foreclosure and give the house to the lender.

Homeowners interested in taking out a HECM must also receive mandatory counseling with an independent agency approved by the U.S. Department of Housing and Urban Development. Typically, counseling is free or available at a reduced cost.

To locate a FHA-approved lender or HUD-approved counseling agency, you can visit HUD’s online locator or call the department’s Housing Counseling Line at (800) 569-4287.

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