If you’re 62 or older and you own your home, you probably know that a reverse mortgage is one way to tap your home equity—and potentially boost your retirement savings.
The reverse mortgage, which is actually a loan, essentially converts your equity into a lump sum of cash or regular monthly check. You don’t have to pay back the loan: Instead, when you move or die, your home becomes the property of the bank.
If you feel reluctant to take this type of loan, however, you likely have good reason. Reverse mortgages come with high fees, require you to get mandatory financial counseling, and can leave you unable to pass your property to your children after you die.
But recently, a slew of startups and financial firms have cropped up to offer reverse mortgage alternatives. All promise to let you tap your home equity—without incurring debt.
But are these newfangled alternatives to reverse mortgage loans safe—and sensible? Here’s what you need to know.
Selling your future gains
The traditional reverse mortgage is pretty much an all-or-nothing proposition.
But now a growing list of companies—including Equifi, Hometap, Patch, Point,and Unison—let you cash out just a portion of your home’s value (usually up to 20%), in what’s known as a shared equity agreement.
Under the agreement, the company gives you cash in exchange for a portion of the upside in the home’s value at some point in the future. In essence, they become co-owners of your home (though you will still continue to pay the mortgage and property taxes).
Shared equity agreements have a fixed term, often as little as 10 years but sometimes as long as 30. At the end of the term, you have to pay back the equity you received, plus the company’s share of appreciation, which most people do by selling the home.
There are no age restrictions on these agreements—and again, no monthly payments—but there are fees: Unison, for example, charges 3.9%.
And not surprisingly, the cash you get upfront will usually be less than what you’ll forgo in the future. For instance, you might receive 10% of your home’s equity today in exchange for letting go of 20% of its future value.
Converting to a rental
In the sale-leaseback model, the company first purchases your home, giving you your equity (minus fees) in a lump sum of cash. Then they rent your property back to you for as long as you want.
The monthly rent is based largely on the market average of comparable homes in your area.
You can renew your lease annually for any number of years you’d like. And if your circumstances change down the line, you have the option to re-purchase your home.
Irene and EasyKnock pay your real estate taxes and insurance and cover structural maintenance in perpetuity too.
Sale-leaseback companies also charge fees, of course. EasyKnock’s fee is 2% of your home’s value plus an average of 1.5% in closing costs.
To repurchase your home, you’ll pay the funding amount you initially received, plus a premium of 5% in the first year or 2.5% in subsequent years.
The main drawback with sale-leaseback arrangements is that you no longer own your home and can’t leave it for your heirs.
But if you need cash, and want to avoid taking on debt, making use of the equity in your home can be a smart alternative.