Reverse Mortgage, 401k Loan or Equity Sharing Agreement: What's Right for You?
When it comes to securing financial stability in retirement, there are a number of options available to homeowners. Two popular choices are taking out a reverse mortgage or borrowing from a 401k loan. However, there's also the option of an equity sharing agreement. So, which one is right for you?
Let's take a look at the key considerations for each option:
With a reverse mortgage, you can tap into the equity you've built up in your home. The loan is repaid when the property is sold, either when you die or move out.
The main advantage of a reverse mortgage is that you don't have to make any monthly repayments. This can free up cash flow in retirement and give you more flexibility in how you spend your money.
However, there are some drawbacks to consider. First, the interest on the loan will add up over time, which will reduce the inheritance you can leave to your heirs. And second, if you need to move out of your home before the loan is repaid, you may have to sell the property to cover the outstanding balance.
With a 401k loan, you can borrow up to 50% of your account balance, up to a maximum of $50,000. The loan must be repaid within five years, typically with interest.
The main advantage of a 401k loan is that the interest you pay goes back into your account. So, in effect, you're paying yourself interest. Additionally, the loan repayments are made via payroll deductions, so you don't have to worry about making monthly payments.
However, there are some drawbacks to consider. First, if you leave your job before the loan is repaid, the outstanding balance will become due immediately. And second, if you can't repay the loan, the outstanding balance will be treated as a withdrawal from your account and subject to taxes and penalties.
Equity Sharing Agreement
With an equity sharing agreement, you can sell a portion of your home's equity to an investor in exchange for a lump sum of cash. The investor then becomes a partial owner of your home and is entitled to a share of any future appreciation in the property's value.
The main advantage of an equity sharing agreement is that you don't have to make any monthly repayments. And unlike a reverse mortgage, you don't have to worry about the loan balance growing over time.
However, there are some drawbacks to consider. First, you'll have to give up a portion of the future appreciation in your home's value. And second, if you need to sell your home before the investor's share is paid off, you may have to pay the investor a portion of the proceeds from the sale.
So, which option is right for you? It depends on your individual circumstances. Be sure to speak with a financial advisor to determine which option makes the most sense for you.