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Discover the keys to unlocking your home's hidden potential and securing a brighter financial future. From understanding eligibility requirements to exploring repayment options, our articles will help you navigate the landscape of homeownership and reverse mortgages.
Reverse mortgage strategiesHow to Tap Into Home Equity Without RefinancingThe prospect of being able to tap into your home equity without having to refinance your existing mortgage is something that is appealing to many homeowners. With property values as high as they are currently, many homeowners seek to leverage their home equity. In this article, we'll discuss how that may be possible and the benefits and risks associated with accessing equity without refinancing your existing mortgage.
Meet the expert
Michael G. Branson, CEO of All Reverse Mortgage, Inc. and moderator of ARLO™, has 45 years of experience in the mortgage banking industry. He has devoted the past 19 years to reverse mortgages exclusively.
What is home equity?
First, knowing exactly what home equity is and how to determine your equity position is important. Home equity is simply the difference between your current home value minus any mortgages or liens secured against the property. For example, if you have a home worth $500,000 with total outstanding mortgages/liens of $200,000, you would have an equity position of $300,000. Your equity position is ever changing as your mortgage balance(s) go up or down and your property value either increases or decreases.
Your home equity can increase in two ways:
Paying down your existing mortgage(s). The lower the amount you owe against the property, the more equity you will have.Property value increases. If property values increase, your equity position can also increase if your balance is stagnant or decreasing.
Why wouldn't you want to refinance?
Whether or not to refinance your existing mortgage comes down to timing. What does the current market look like as it pertains to interest rates? How many years are remaining on your current mortgage? Are you planning to stay in this property for the foreseeable future, or are you likely to sell in the next few years and relocate?
These are the factors you need to consider when evaluating if a refinance makes sense:
Your current mortgage terms. Do you have a low fixed interest rate? As of October 2023, rates have reached a level they have not seen in many years. Refinancing from a low fixed interest rate to a much higher rate would not be in your best interest to access home equity because your monthly payment would increase drastically.The remaining term of your existing loan. Are you 5, 10, or even 15 years into the 30-year term of your existing mortgage? Unless you are prepared to refinance to a shorter-term loan this time around with the potential for a much larger mortgage payment, you could be facing the prospect of starting over on a new 30-year mortgage, which means you will end up paying significantly more interest over the life of your home ownership.Refinancing may not be in your best interest if you sell your home and move to a new home. A refinance usually comes with closing costs included in the transaction, increasing your loan balance above and beyond the amount of equity you are looking to extract. You will reduce the amount of proceeds you will see when you sell.
So, how do you actually tap into your equity without refinancing?
In truth, there are only two ways to tap into your home equity without refinancing your existing mortgage. Let's break that down below and review each option's pros and cons.
1. Take out a home equity loan
"A Home Equity Loan, often referred to as a "second" mortgage, is a loan subordinate to your existing mortgage. These products allow you to access equity without disturbing the existing loan you have in place or its terms. There are two types of Home Equity Loans:
Home Equity Line of Credit (HELOC)
"A HELOC is an open-ended loan program that allows you to borrow funds on an "as needed" basis. This means you do not have to advance all available funds on day one when the loan consummates. Additionally, borrowed funds on a HELOC can be repaid and then reborrowed during the draw period, which usually lasts 10 years on average.
Here's how it works:
Credit limit: When you obtain a HELOC, you are approved for a specific amount by the Lender or Bank. This is similar to the limit on a credit card. You can advance funds up to the limit on the loan.Flexible access: As noted above, you do not have to advance the entirety of the credit limit at the beginning of the loan and can advance as needed during the draw period. This flexibility allows you to minimize the interest you pay to a certain degree.Interest and repayment: During the draw period of a HELOC, your minimum monthly payment is usually interest only on a variable interest rate. Your interest owed is only calculated on the outstanding balance, not the credit limit. At the end of the draw period, the HELOC will reset, and you will begin making principal and interest payments to pay back the outstanding balance over a specified period of time, usually between 10 and 20 years. When a HELOC resets, the monthly payment will increase significantly, which can cause financial hardship if the loan is not paid off or refinanced before the reset.Revolving credit: During the draw period, you can advance and repay funds that have been advanced. Funds that are repaid become available to be reborrowed.Variable interest rate: HELOCs have variable interest rates, so your monthly payment will either increase or decrease as the market fluctuates.Secured by your home: A HELOC is not a "personal" or "signature" loan, meaning your home is the collateral for the mortgage, just like your existing mortgage. Failure to repay the loan according to the terms can lead to foreclosure.
Home Equity Loan (Closed End)
A Home Equity Loan is a closed-end mortgage that performs more similarly to a traditional mortgage. These types of loans are single disbursement loans where the entirety of the loan amount you borrow is advanced at the time of loan consummation. They usually come with a fixed interest rate where you will make payments over a scheduled period of time (5-30 years) to repay the loan in full. Like a HELOC, your home secures it, and failure to repay the loan according to the terms can lead to a foreclosure. Home Equity Loans can also come with a balloon payment feature, which, similarly to a HELOC reset feature, can present a significant financial hardship.
A balloon payment means the monthly payment is calculated based on a 20 or 30-year term, so the payment is reasonable. Still, the entirety of the loan balance is due in a time period lesser than that amount, with some being as short as 5 years. If you have a plan to pay that loan off before the end of the balloon term, you could avoid foreclosure.
ProsYou can access your home equity without refinancing your existing first mortgage.HELOCs often have very little in closing costs to obtainHELOCs allow you to access funds as you need themHELOCs only have interest payments on the outstanding balance and not the entire credit limitConsHELOC interest rates can change over time, increasing your monthly paymentWhen a HELOC resets (draw period ends), your monthly payment will increase significantly, which can cause financial hardshipHELOC funds are not guaranteed, and the loan can be frozen or reduced due to unfavorable market conditionsHome Equity Loans may have a balloon payment feature, which can cause financial hardship
2. Sell your home
Outside of taking out a Home Equity Loan, the only other way to access your home equity without refinancing is to sell the home. This may be a non-starter for many homeowners who have no desire to relocate from their current home. However, selling your home can access your home equity for those looking to downsize or move to a different location.
When it comes to selling your home, there are several factors to consider and questions you will have to answer:
How much will you receive in proceeds from the sale? When you sell your home, you will incur costs for real estate commissions, closing costs, and the costs associated with moving. Will you be able to buy your new home outright, or will you need financing in the form of a mortgage to bridge the gap? Suppose a downsize or relocation cannot be funded solely by the equity in your current home. In that case, you must look into financing options to accomplish that move, which could lead to similar or even more monthly expenses than your current home.Will there be any tax liabilities? You should always consult your tax advisor when it comes to these matters.
Beware of potential pitfalls and red flags
Overborrowing
A lender or bank may approve you for a HELOC in an amount greater than you ultimately need. It is vital that a homeowner not advance more from their HELOC than they can afford to repay when the loan reaches the reset period. One such pitfall is spending line of credit funds on non-essential or frivolous purposes.
Failure to make payments
Whether you have a HELOC or a closed-end Home Equity Loan, you have mandatory monthly payments that you must make to keep the loan in good standing. Failure to do so can lead to the lender foreclosing on the property.
Balloon payments
Some home equity products may include a balloon payment provision. This means that the entire loan balance becomes due after a specific period of time. It would be best if you planned for this to avoid financial difficulties.
Unscrupulous lenders
Be cautious of predatory lenders offering home equity products with unfavorable terms or excessive fees. Always work with reputable lenders and seek financial advice from trusted professionals or counselors.
Maximizing home equity for financial success
When done correctly, unlocking your home's equity without refinancing can be a smart financial move. By exploring your options, understanding the risks and benefits, and making informed decisions, you can access your property's hidden wealth while maintaining your existing mortgage structure.
» HELOC vs reverse mortgage: What's the smarter choice?
Traditional refinance, home equity loan, and selling your home not an option?
For homeowners age 62 and older, you can consider refinancing your existing mortgage to a reverse mortgage. A reverse mortgage is a loan that works in "reverse" of a traditional or "forward" mortgage. With a reverse mortgage, there are no mandatory monthly mortgage payments. Instead, the interest on the loan is added to the outstanding loan balance so that the balance will increase over time. A reverse mortgage does not become due until the loan reaches maturity. Maturity events on a reverse mortgage are:
The passing of the last surviving borrower or eligible non-borrowing spouseFailure to pay the property taxes or homeowners insurance premiumsMoving out of the property permanentlySelling the home
Before considering a reverse mortgage as an option, you need to know the basic requirements to be eligible to apply. Those are:
You must be at least 62 years of age. If you are married, only one spouse must be 62 in most statesThere needs to be ample equity in the propertyYou must live in the property as your primary residence
ProsThe government insures the Home Equity Conversion Mortgage (HECM) through HUD, and the proceeds are guaranteed. Reverse mortgage proceeds, whether in a line of credit or received on a monthly payment plan, cannot be frozen or reduced due to market conditions Unused funds in the Line of Credit are subject to a line of credit growth rate, allowing the available funds to the borrower to increase over timeNo mandatory mortgage paymentConsHome Equity can decrease over time as interest is added to the balance due to not having to make a mortgage paymentHigher closing costs on average when compared to a traditional or "forward" mortgageProperty must remain your primary residence. If you wish to move, you must pay off the reverse mortgage or sell the home
A reverse mortgage could represent a win-win situation for the right homeowner—payment relief by eliminating the current mortgage while simultaneously tapping into home equity. The amount of equity that can be tapped ultimately is determined by the age of the youngest borrower or spouse and where interest rates are at the time of application. The older you are, the higher the percentage of the home value you can borrow—additionally, the lower the interest rate, the higher the percentage.
Reverse mortgage strategiesCan Seniors on Social Security Get a Mortgage?Let's get straight to the point: Yes, seniors on Social Security can get a mortgage.
While you may have discredited yourself here, the law prevents lenders from denying your application based on your Social Security status. And while a reverse mortgage is available for people age 62 and over, seniors can get any loan for which they qualify.
This means that mortgage qualifications for seniors on Social Security are the same as for any other applicant.
Qualifying factors include:
Financial eligibility and incomeCredit history and scoreDebt-to-income ratio
Note that your Social Security may be grossed up by 25% if you qualify for a mortgage. This increase is meant to compensate for non-taxable income, which Social Security is considered to be.
But this is still harder for most borrowers to qualify for than a reverse mortgage because the reverse mortgage uses a different method. Instead of employing those debt-to-income ratios mentioned, reverse mortgages use a residual income method. When you consider that there are no monthly housing payments with a reverse mortgage, the qualification gets much easier, but we will get back to that.
Meet the expert
Michael G. Branson, CEO of All Reverse Mortgage, Inc. and moderator of ARLO™, has 45 years of experience in the mortgage banking industry. He has devoted the past 19 years to reverse mortgages exclusively.
Factor 1: Financial eligibility and income
A lender will break down your income into percentages to assess whether you can afford the mortgage. The general rules to qualify for a mortgage are:
28% for housing 38% for all other qualifying expenses
However, each lender and program may have variations in these percentages. Occasionally, a lender will allow up to a 48% total debt-to-income ratio to qualify.
That 28% under normal circumstances means that if the mortgage payment is $1,200 per month, your monthly income must be roughly $4,286 to qualify for that mortgage. There is no housing payment with a reverse mortgage, so there is no ratio to compute. For a single person in CA, your income must be at least $589 above and beyond any debts you owe, including property charges (taxes and insurance). If you have no debts, that might be as low as $1,000 to qualify if your taxes and insurance are low.
So, while a senior may very well qualify for a standard or forward loan, their chances of qualifying for a reverse mortgage are usually much better.
The best practice is to fully discuss your specific situation with a lender to get advice and make an informed decision.
» These are some of the best reverse mortgage lenders available
Factor 2: Credit history and score
To qualify for a mortgage, you must exhibit a credit history and score that proves you have the capability and means to pay your debts in a timely manner. The following adage is always applied:
The way one pays their bills in the past is indicative of how they will perform in the future.
It would be best if you usually had a minimum credit score 620 to qualify for a forward loan. However, other factors like income, assets, and collateral will play into the final decision. Any score over 700 is very favorable and will go a long way toward qualifying for a mortgage. Occasionally, lower scores (to 580) are considered, but that's in rare cases. While reverse mortgages conduct a credit review and a financial assessment, credit scores are not considered in the final analysis.
Factor 3: Debt-to-income ratio
The potential lender will review and compare your total debt to your total income before taxes. The ratio is then presented as a percentage. For example:
(Total Monthly Debt Payments / Gross Monthly Income) x 100= ($1,500 / $4,000)= 37.5%
In this example, your debt-to-income ratio is 37.5%, which means you use 37.5% of your gross monthly income to cover your debt payments. A lower ratio is generally more favorable for a standard or forward loan because it indicates you have more financial flexibility to take on new debt obligations.
However, let's compare this to a reverse mortgage. With that same income, you could have monthly debts of $3,000, including the property charges, and still qualify for the reverse mortgage (remember, there is no mortgage payment, and you only need $589 per month in the highest region to qualify - some areas it is even less).
Take a look at the numbers:
(Total Monthly Debt Payments, including property charges)= ($3,000*)Incl. Taxes, insurance, utility factor, car payments, credit cards, other monthly credit installments, student loans, etc.(Total Monthly income minus all charges equals residual income.)= ($4,000 - $3,000) = Residual Income $1,000 (must be greater than $589 for a single person
This borrower qualifies for the HECM reverse mortgage, but their ratio for a forward loan would be 75% and too high ($3,000 / $4,000).
However, each lender may have room to deviate from ratio guidelines in their programs, 75% is most likely too high for any forward lender. This is why reverse mortgages are a viable alternative for seniors on fixed incomes like Pensions and Social Security.
Want to make sure your mortgage calculations are correct? Try the Reverse Mortgage Calculator by ARLO™ to get a quote. Compare different mortgage programs side-by-side to find the best option.
Types of mortgages available to seniors
All mortgage types are available to seniors. This includes:
FixedAdjustableFHAConventionalBank specific loan programs
The HUD reverse mortgage is also available to seniors who receive social security and pension incomes and often provides better financing options than programs using qualification guidelines.
Down Payment Assistance programs sometimes offer special assistance if you're on a fixed income. Perhaps you can't save for a down payment, or you need to retain income-producing assets. Alternatively, FHA reverse mortgage loans can also be attractive because they're somewhat easier to qualify for and do not require the borrower to make a monthly mortgage payment (borrowers are responsible to pay their taxes and insurance in a timely manner).
Advice for seniors considering a mortgage
You need to ask many questions about your potential lender because it's important to understand the loan process, program requirements, closing costs, and interest rates before committing to the loan. Try:
Obtaining and comparing an estimate of closing costs as fees can vary between lenders.Focusing on one lender once you're satisfied with potential costs and rates.Reviewing your credit report to make sure there are no mistakes on it.Don't get hung up on just one initial fee (i.e., appraisal cost) so that you miss others that add up to much more over the life of the loan.
There are numerous ways to look at your credit report online with no credit score ramifications. It's best to make any adjustments before going to a lender, and making changes after a lender has seen it can make qualifying harder.
» What if you don't qualify? Explore your options
Taking the leap: Seniors and mortgage approval
Seniors on Social Security have the opportunity to secure mortgages, especially since they're backed by legal protections. Your mortgage qualifications closely mirror those of other applicants, including financial eligibility, credit history, and debt-to-income ratios when you are looking at standard forward loans. We encourage you to explore various mortgage options, seek lender guidance, and diligently review your financial profiles while enjoying the prospect of homeownership during retirement. Get the facts on all loan types, including both forward and reverse mortgages, and then choose the loan type that is right for you and helps you to achieve your goals best.
Reverse mortgage strategies10 Tips for Seniors on Fixed Income to Help Save MoneyAs expenses increase, those on fixed incomes will feel increasing stress levels. Additional expenses such as medications and healthcare can also increase as someone ages. At the same time, a mortgage, car payment, or credit card debt may have been established when income was steady and now can't be afforded with the current limited fixed income. In fact, around 44% of Americans on fixed incomes are still paying off their mortgages.
Seniors are looking at less ability to earn; jobs may be fewer, and seniors may simply not be able to work as much as they once could—younger age groups can usually get new and even multiple jobs to handle their debt load successfully. Thus, seniors must plan to adjust their debt loans early as fixed income begins. However, you can save money in many ways to help widen the gap between your fixed income and your monthly expenses.
» Want a higher monthly income without saving money? See our ultimate guide to reverse mortgages
Meet the expert
Michael G. Branson, CEO of All Reverse Mortgage, Inc. and moderator of ARLO™, has 45 years of experience in the mortgage banking industry. He has devoted the past 19 years to reverse mortgages exclusively.
4 ways to save money on essentials
1. Reduce your utility bills
Implementing the following strategies can help reduce the typical utility costs such as water and electricity:
Keep your thermostat closer to outdoor temperaturesReview the viability of solar panels with state government grantsWater lawns less or recycle rainwater with storage tanksLower shades during the day in the summertime to lower inside tempsDo fewer laundry loadsBe sure to use the dishwasher only when full and run the quickest settings
» Learn more: Reducing utility bills with reverse mortgages and solar panels
2. Use government-funded healthcare
Many states offer specific medical cost reduction programs to seniors. Check your eligibility for special programs through Medicare to receive help with medications and over-the-counter personal care items. Your local clinic can help you take advantage of these particular plans.
» Don't get caught out: Learn how reverse mortgages can affect Medicaid and SSI benefits
3. Use money-saving grocery hacks
There are many ways to save money on groceries, from magazine or newspaper coupons to buy-one-get-one-free deals. Additionally, Medicare and other state-lead programs may assist with groceries, while food banks and churches can also help you get many essential grocery items.
4. Use less private transport
Most counties provide some kind of public transportation for seniors. Giving your municipality a call can be a valuable source of information. At the same time, the clinics and churches that often help with groceries may also have transportation programs for essential trips.
4 money-saving housing and lifestyle considerations
1. Find more affordable housing
Placing a call to your city and/or county offices can be the first step to finding special housing options, and many non-profit agencies specialize in affordable housing.
2. Explore less costly leisure activities
Usually, senior citizen centers like YMCAs in most areas offer many free activities planned especially for seniors.
3. Consider downsizing
Downsizing can be difficult at first, but it's important to remember that a better quality of life is the goal and can outweigh the negative aspects of selling or giving away some of your material possessions.
You might enjoy the new situation once you make the move and find that your day-to-day life is more manageable! Although the cost of some centers can be very high, financial assistance programs like Medicaid can help with funding and administrative challenges.
4. Make a budget and stick to it
A budget can help you ensure that your basic needs are always met while showing you exactly how much you have to spend on your amenities.
When creating your budget, remember these three rules:Before allocating any funds, explore all the financial assistance available for housing, drug costs, and groceries.Take care of your needs before your wants.Allocate some of your funds to leisure, and don't spend any more!
2 ways to ensure long-term financial security
1. Senior-suitable investment opportunities
One of the best investment strategies for seniors is using your home's existing equity. Leveraging strategies like reverse mortgages can give you access to extra cash that can be invested in profitable markets like real estate or used to pay off high-interest debt, helping you to continue living in your home with less stress.
Additionally, low-stress part-time jobs—like librarians or non-profit agency work—are often available to seniors and can supplement a fixed income.
» Learn more about the different reverse mortgage payment options
2. Be wary of scams
Unfortunately, seniors are generally more susceptible to falling victim to the rapidly evolving nature of scams. Avoiding them all can be difficult, but here are some tips:
Banks and mortgage companies will never ask for personal information such as account or social security numbers; only scammers will.Emails are an easy access point for scammers. You should ignore all emails with poor grammar that come from generic domains. Anyone (including scammers) can create a Gmail address for free, while professional companies will pay for a custom domain that matches their brand. Check the sender's email address from your Gmail account; a legit one might say "accounts@wellsfargo.com" while a fake one might say "accounts.wellsfargo@gmail.com".If you're unsure about the person you're in contact with, you don't have to continue the conversation! There's nothing stopping you from hanging up the phone and contacting a relative who can help. A legitimate business may contact you later, allowing you to research their information or check with knowledgeable relatives. At the same time, a scammer will likely move on to the next victim instead.
Don't be afraid to ask for help!
One of the biggest pitfalls you might face when trying to save money is trying to manage it yourself when you need help. Dozens of agencies, churches, and programs specialize in helping seniors on fixed incomes better manage their funds.
» Need more info? Reach out to a qualified reverse mortgage lender or continue your journey learning how reverse mortgages work.
