The National Reverse Mortgage Lenders Association estimates there were almost 42,000 reverse mortgages taken out by seniors in 2020 alone. However, not every senior is eligible for this type of loan or may want it as an option. Here are 8 reverse mortgage alternatives to consider before making your decision to go with a reverse mortgage.
Reverse mortgages are a financial tool that can be an advantage for some senior homeowners. Reverse mortgages allow the homeowner to live in their home while they receive income based on the equity in their property. Reverse mortgages have many advantages but also come with disadvantages. It’s important to examine all available options before proceeding with a reverse mortgage.
How Reverse Mortgage Works
Reverse mortgages are a type of loan that allows homeowners 62 years or older to borrow money against the equity in their home. There is no credit check necessary and you do not have to make any payments on the loan until the homeowner leaves the property permanently. The funds can be used for any purpose and the money received are tax-free. Reverse mortgage proceeds are paid to the homeowner in the form of a loan balance and monthly payments over time. The homeowners will receive payment until death or they move out permanently.
The 8 Reverse Mortgage Alternatives
Sell Your Home & Downsize
Selling your home will not only unlock 100% of your equity, but it will also give you the opportunity to buy or rent a new one. You may make some sacrifices in the transaction, like paying commission fees and fixing up the home to maximize its sale price, but you could come out on top in the end. If you own a more expensive home that has appreciated considerably, please calculate any taxes that will be owed after the sale. You can offset these costs by adding renovations or other improvement-related expenses to the original purchase price. Seniors also can save money on property taxes from the large home.
You also have to consider the need to find a new place to live after selling your home. Unless you’re moving in with family members, you will need to spend money on rent or a mortgage while also considering any related expenses like deposits or moving costs.
Refinance Your Home
Refinancing is not a new process and it has been around for a while, but with the interest rates at a record low level, now is a good time to think about refinancing your home.
A mortgage rate-and-term refinance will usually lower monthly payments or if you can get a lower interest rate that’s even better. Another option is a cash-out refinance where you can borrow up to 80% of your home’s value.
With a cash-out refinance you might choose it if interest rates are low or if you need a lump sum now but will have the reliable cash flow going forward. The catch with refinancing is that credit and income have to be considered in order to get approval. With adequate credit, you can get the best interest rates.
Income should never be a roadblock to refinancing your home. If you have Social Security, pension income, annuity income, and retirement account assets, lenders can still qualify you for a loan.
Closing costs are also something you need to know before you refinance your home. Lenders will offer to pay closing costs in order to get your business, but this is an option that should be looked at carefully. You can also roll some of the closing costs into the new loan, which lowers your monthly payments.
Open a Home Equity Line of Credit
A Home Equity Line of Credit is a good option for helping with retirement. This is another form of home equity loan that can be used as a low-cost safety net by offering access to cash and only requiring interest payments on the sums you borrow and not the whole amount. A HELOC can be an attractive alternative to a reverse mortgage because of the low costs and offers an option for those that are comfortable with variable interest rates.
With a HELOC you can choose to make interest-only payments during the draw period, or after that, you must repay all your principal plus interest. It can act as a low-cost safety net during retirement, offering access to cash in case you need it. For example, you could have a $100,000 HELOC that you pay no interest on because you haven’t drawn on it.
One thing that seniors should be aware of is that HELOCs have variable interest rates and the interest rate may increase over time. If that does happen, will you still be able to comfortably make the payments?
Another thing that seniors need to take into account is that HELOCs are second mortgages. This means that if you want to leave your house behind for your heirs, it will be encumbered by a second mortgage after your death.
Open a Home Equity Loan
A home equity loan provides a lot of stability and security. The monthly payments are fixed and you pay interest on the whole loan, not just what you borrow each month. This is very similar to monthly mortgage payments you make on a traditional forward mortgage. It is also a good source for an emergency fund to prepare for retirement, car repairs, and avoiding selling investments during a market downturn.
Be aware that just like a fixed-rate first mortgage, the interest rate on home equity loans are usually higher than that of a HELOC.
Opt for a private reverse mortgage
While the most common type of reverse mortgage is a Home Equity Conversion Mortgage or HECM, you don’t have to go that route. One alternative is to set up a private reverse mortgage between your family members – usually, your adult children – who make regular payments to you, and they get those contributions back when it’s time to sell the house.
Be aware that this could affect your tax situation and estate planning, therefore it’s a good idea to talk to a tax specialist or attorney before moving forward.
Sell the home to family or friends
If you want to stay at your home, consider selling the entire house to family members or close friends. They will be willing to purchase it at a lower price than what’s typically offered on the market. This way, you can live in your home off of monthly payments from them. There are different ways to do this too, like selling one-half of the house for a lump sum or setting up a mortgage agreement with monthly payments.
Be sure to have everything in writing before you sign, and check with an attorney on how this will impact your taxes.
Rent to vacationers
For cash-strapped retirees, the sharing economy offers a unique opportunity to generate additional income from your home. Seniors can look into short-term rental solutions such as opens in a new windowAirbnb, VRBO, and others to rent out rooms in their homes.
Each service has its own rules so if you decide to go with Airbnb, it is important to be aware of the laws regarding short-term rentals in the area(s) your property is situated in. Also, you’ll need to be sure the home is suitable for overnight guests and that you have all of the required amenities.
The Bottom Line
Reverse mortgages are a good option for many senior homeowners. Reverse mortgages let you borrow based on the equity in your home. Instead of paying the bank, the bank pays you — tax-free — with a series of payments via a partial lump sum or line of credit. However, they come with some big disadvantages as well and should be considered carefully before making any decisions about this type of loan that will have long-term effects on your finances and retirement plans if not managed correctly from day one.