Reverse Mortgage Alternatives
Even if you do not qualify for a reverse mortgage, there are other options.
A Reverse Mortgage can be a useful tool in helping seniors to maintain their independence and stay in their homes as long as possible after retirement. But, a reverse mortgage is not without limitations. People with a high value home may be shocked at how little they can qualify for in a reverse mortgage because of the loan limits with FHA.
To fill this void in the market, a relatively new product called equity sharing has been designed to help those that don’t qualify for a reverse mortgage. Even if you do qualify for a reverse mortgage, equity sharing can be an alternative that is not a mortgage and does not accrue interest.
With equity sharing, the property owner (age 65 to 85) agrees to share the future appreciation of the property with the financial institution in exchange for cash today. The home owner is allowed to keep 100% of the equity based on current appraised value. Then, going forward, the home owner will split the appreciation 50/50 with the financial institution. As compared to a reverse mortgage, equity sharing does not have an interest rate accruing, it is not recorded as a mortgage on the property, and it can be used on properties other than the owner’s primary residence.
Example 1:
A home owner in California has a primary residence that is worth $1.2 million with a current mortgage balance of $500,000. Because the maximum allowable reverse mortgage is $417,000, this home owner would not qualify. But, with equity sharing, he could get up to $180,000 in cash (15% of the current appraised value) without a loan or a monthly payment, and without the need to payoff the current mortgage balance (assuming the current mortgage is not a reverse mortgage or a negative amortization loan).
Example 2:
A home owner in Tennessee has a beach house in Florida. He wants to get a reverse mortgage on the beach house, but doesn’t qualify because it is not his primary residence. The house is worth $750,000 with a current mortgage balance of $300,000. He would qualify for $112,500 in exchange for a 50% stake in future appreciation. Ten years from now the home owner sells the house for $1.2 million. The difference in equity is $450,000 since agreement was made. The equity partner takes $225,000 (half of the appreciation) plus an 8% surcharge to cover transfer costs and Realtor fees, leaving the owner with net proceeds of $879,000, plus the $112,500 already received at the time of the agreement.
While it does create opportunities, equity sharing is not without its disadvantages. Depending on how rapidly you think the home will appreciate, the costs could significantly outweigh the costs of a reverse mortgage or other interest bearing alternative. That being said, it is one of the more realistic alternatives to reverse mortgages available today.
If you would like to find out more about a reverse mortgage or an equity sharing program, send me an e-mail at steve@steverussellonline.com with your name, phone number, date of birth, state where the porperty is located, and the value and mortgage balance on the property. Or, call me toll free at 888-257-8383 for a free consultation.
