Table of Contents
Alternative to Reverse Mortgages
Looking for an alternative to reverse mortgages? Continue reading to learn what you can do instead of getting a reverse mortgage.
Many seniors in this situation may find relief through a reverse mortgage, a type of financing designed exclusively for senior homeowners that can assist in providing the funds necessary for a pleasant retirement.
However, these types of loans are not ideal for everyone, and it’s critical to understand your alternative options if you’re in need of financial aid.
Before we look at reverse mortgage alternatives, let’s take a look at the loan itself, who might qualify for one, and why you might want to examine other options.
How Is a Reverse Mortgage Defined?
Reverse mortgages are loans that enable homeowners aged 62 and older to convert their home equity to cash.
The loan pays down the homeowner’s mortgage first, and the remaining funds are spent how the homeowner wishes.
While the homeowner is still responsible for property taxes and homeowners’ insurance, they will not be required to make another mortgage payment until the home is sold, they move out, or they die.
The following criteria must be met in order to qualify for a reverse mortgage:
➣ You must be 62 years of age or older.
➣ You must have a sufficient amount of equity in your home.
➣ Your principal residence must be the home.
➣ If you apply for a home equity conversion mortgage (HECM), which is a government-insured reverse mortgage, you will be required to attend counseling and submit to a financial evaluation.
Pros And Cons of a Reverse Mortgage
It’s critical to examine all of the benefits and drawbacks of a reverse mortgage before choosing whether it’s a viable option.
Pros:
A reverse mortgage may be obtained for a variety of reasons, including the following:
➣ Eliminating their monthly mortgage payment while maintaining their property taxes, insurance, and home maintenance obligations
➣ Refinancing their debts
➣ Making upgrades to your home
➣ Adding to their revenue
➣ Increasing their financial reserves
➣ Financing in-home care
Cons:
While these types of loans might be beneficial in retirement, they do have certain disadvantages. Consider the following:
➣ These loans frequently carry extra costs, such as counseling fees and additional closing costs.
➣ If you fail to continue paying your property taxes and homeowners insurance, as well as maintaining the home, you risk losing it.
➣ The loan may affect your eligibility for government assistance programs such as Medicaid or Supplemental Security Income (SSI). If you get these benefits, you should consult a financial expert.
➣ These loans are complex and fraught with danger. It is critical to comprehend them completely.
➣ Due to the complexity of these loans, they are frequently utilized in financial frauds targeting seniors.
Due to the disadvantages of these loans, it’s a good idea to seek reverse mortgage options for seniors.
Alternative to Reverse Mortgages
1. Downsize and sell
While it’s difficult to let go of your home, selling may provide you with greater flexibility.
Plus:
➣ If you have equity in your home, selling it is likely to net you more than taking out a reverse mortgage.
➣ The earnings from the sale can be used to purchase or rent a more reasonable property, or to relocate with relatives.
Minus:
➣ Your residence is no longer yours.
➣ It cannot be bequeathed to heirs.
2. Mortgage refinancing
Mortgage rates continue to be historically low. If your rate is now too high, consider refinancing to bring your monthly payment down to a more bearable level.
Plus:
➣ Fees are often lower than those associated with reverse mortgages. Your descendants may still be eligible to inherit the property.
Minus:
➣ You must make mortgage payments on a monthly basis.
3. Submit an application for a home equity line of credit.
A home equity line of credit (HELOC) normally has a period of five to fifteen years. The initial portion of the term, say, ten years is your “draw” period, during which you are just needed to make interest payments and are not expected to repay the principal.
HELOCs are an excellent alternative for seniors who desire a safety net to cover future unforeseen expenses.
They may also make sense for homeowners nearing the end of their lives, since they can take advantage of the low-cost draw period while avoiding the increasing payments afterwards.
Plus:
➣ Fees are lower than those associated with reverse mortgages.
➣ You may withdraw funds in lump sums or as needed.
➣ Rates are lower than those associated with reverse mortgages.
➣ During the draw period, you have the option of making smaller interest-only payments or principal and interest payments.
➣ Interest may be tax deductible if the proceeds of the loan are utilized to purchase, construct, or substantially improve the home. The Internal Revenue Service explains the guidelines on its website.
Minus:
➣ You have a finite quantity of equity available to you. The amount of your loan is determined by your equity and credit profile.
➣ When the draw time expires, your low-interest payments will cease, and your payments will increase. If you fall behind on payments, you run the risk of foreclosure.
➣ Interest rates are often adjustable, which means that payments can increase or decrease in response to changes in mortgage rates.
➣ Keep an eye out for predatory lending techniques, particularly if you have credit concerns or are older. The Federal Trade Commission provides information on what to look for.
4. Apply for a home equity loan.
A home equity loan enables you to obtain a lump sum of equity in your property.
In contrast to a reverse mortgage, you return this loan in fixed monthly amounts over a certain length of time. Fixed-rate or adjustable-rate home equity loans are available.
Plus:
➣ Your home remains in your family as long as the debt is repaid.
➣ Interest paid may be deductible as a business expense (see No. 3, above).
➣ You can obtain a fixed (steady) interest rate on a home equity loan.
➣ Fees are lower than those associated with reverse mortgages.
Minus:
➣ If you fall behind on your monthly payments, you run the risk of losing your house to foreclosure.
➣ You can only borrow up to a certain amount of home equity.
➣ Monthly principal and interest payments are necessary.
➣ If you choose for an adjustable-rate loan, your payments may increase.
➣ You may need to do some research to locate lenders who offer home equity loans.
5. Offer the house for sale to family or friends
Consider whether family members will purchase your home, possibly at a lower-than-market price.
This may enable you to remain there and subsist on their payouts. There are numerous ways to accomplish this.
For instance, you could sell a section of the home, 49 percent, in exchange for a flat sum, or you may arrange for a mortgage with monthly payments to you.
Plus:
➣ You may remain at your residence.
➣ The arrangement may enable someone you care about to purchase a home in today’s extremely competitive market.
➣ Depending on market conditions, your buyer may earn a profit.
Minus:
➣ Borrowing money from family members can exacerbate family tensions and conflicts. Seek legal counsel on the best method for transferring the title and use a formal, binding contract.
➣ You or your family members will require sufficient funds to acquire the home.
6. Provide lodging for vacationers
For cash-strapped retirees, the sharing economy provides an opportunity to supplement limited retirement earnings.
Plus:
➣ The income may be sufficient to allow you to remain in your home or at the very least postpone selling it.
➣ You retain the right to live in your house.
Minus:
➣ You will be forced to share your home with strangers, which is not a pleasant scenario for everyone.
For more information, see VRBO (Vacation Rental by Owner), Airbnb, or Homestay.
7. Rent a room on a monthly basis
Renting a piece of your property on a monthly basis may generate enough revenue to allow you to remain in your current residence.
Screen candidates thoroughly, and get the assistance of a trustworthy friend if you’re unsure how to do so.
Plus:
➣ Seniors, particularly singles, may find companionship beneficial.
➣ Rents are increasing significantly throughout much of the United States. If your monthly mortgage payment is low enough, you may even be able to pay it off entirely through rental revenue.
Minus:
➣ You will lose some of your privacy and complete control over your home. You’ll need a certain amount of intelligence to do background checks on candidates and to manage financial and social transactions.
8. Submit your application for weatherization assistance
Weatherproofing your property can assist you in saving money.
States, in collaboration with the federal government, offer weatherization programs that help low-income homeowners stay in their homes longer through loans, energy upgrades, and decreased utility bills.
States frequently offer precedence to individuals over the age of 60, according to the United States Department of Energy, which details how to apply and includes a map with contact information for each state.
Alternatively, contact your local Area Agency on Aging (type in your city, state, and ZIP code) to learn where to apply, or inquire with your utility provider for electricity or heating fuel.
Plus:
➣ Even postponing obtaining a reverse mortgage benefits you by allowing you to borrow the larger sum available as you age. Make every effort to delay the choice for as long as possible.
Minus:
➣ Even with assistance, you may incur some initial costs before seeing energy savings.
9. Submit an application for property tax relief
Numerous counties and states offer property tax exemptions to seniors who fulfill certain income requirements.
Contact your county assessor’s office to discover about any state or local programs that exempt low-income seniors from paying property taxes, allow them to defer payments, or provide a partial tax credit.
Plus:
➣ You will reclaim your money. Who does not appreciate that?
Minus:
➣ The amount of money saved can be rather small.
10. Take a loan or distribution from your 401(k) plan.
Perhaps you are still working and have not yet begun to withdraw from your retirement accounts.
Consider taking a dividend from your 401(k) plan (there is no penalty after age 5912) or borrowing from it, if your plan permits.
Plus:
➣ This is a viable alternative if you are not subject to early withdrawal penalties.
Minus:
➣ It’s dangerous to withdraw from retirement savings early in life rather than allowing the money to compound.
Significant Takeaways
➣ A reverse mortgage is a form of financing available to homeowners 62 years of age and over that enables them to convert their home equity into cash income without making monthly mortgage payments.
➣ While these products are intended to generate retirement income from home equity, they are not appropriate for everyone.
➣ Among the alternatives you might consider are standard cash-out refinances, second mortgages, or sales to family members.
The Verdict
Reverse mortgages may be an attractive choice for persons who are house wealthy but cash poor, with significant home equity but little retirement income. However, there are alternative ways to access the equity in your property.
Prior to making any selections, it’s a good idea to do some research, shop about for the best rates (if available), and talk with a certified tax specialist or attorney.