October 23, 2018
A reverse mortgage allows you to convert the equity in your home to cash that you can use for other purposes. Essentially, you’re selling your home back to a lender in increments.
It’s a popular method for seniors to supplement living expenses. Repayments don’t begin until the owner permanently moves out of the home, passes away, or transfers ownership – as long as the home is maintained and property-related bills (taxes and insurance) are paid.
However, reverse mortgages have downsides, including equity-reducing fees and potential financial burdens to heirs – not to mention running out of equity before you run out of expenses. Consider these alternatives to a reverse mortgage before you commit.
1. Selling/Downsizing – Instead of selling in increments, why not sell all at once? You’ll probably receive more of your equity and can use some of those funds toward alternate housing.
2. Selling to a Family Member – If a family member is willing and financially capable, you can work out an arrangement to sell your home to that family member while they allow you to stay in the home. Put the terms in writing, or risk family arguments and confusion about obligations.
3. Refinancing – If you have a high interest rate on your current mortgage, you could save money via refinancing. You’ll still have monthly payments to make, but you’ll retain the home to pass on to your heirs.
4. Home Equity Line of Credit (HELOC) – HELOCs allow you to borrow against your equity in a fashion similar to a credit card. You can borrow what you need up to a limit and restore your borrowing limit by making payments.
5. Home Equity Loans – Similar to a HELOC, except the terms are more like a traditional loan. You receive a lump sum and pay off the loan in installments. Home equity loans are good to handle a one-time large expense – but you run the risk of foreclosure if you default on payments.
Remember that your credit score may affect the interest rates you qualify for on a mortgage refinance, HELOC, or home equity loan. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
6. Renting Options – If you’re comfortable sharing your home with strangers, Airbnb and similar rental programs are an option – or you could even consider taking in a roommate on a monthly rental basis. Take both legal and safety precautions if you choose this route.
7. Retirement Plan Funds – If you haven’t retired yet, you may be able to borrow off your 401(k) funds or take an early distribution (penalty-free if you are at least 59½ years old). If you are retired and taking distributions, you can increase your distribution amount for a short period. Take taxes into account and remember that you’re losing out on compounding that you can never get back.
8. Assistance Programs – Do you qualify for property tax relief, utility discounts, assistance with your prescription drug costs, or other government benefits designed to help seniors on a budget? The National Council on Aging (NCOA) offers help finding benefits through the Benefits Checkup Program.
9. Check Social Security Benefits – Check your work history with the Social Security Administration. Verify that there are no errors such as missing income for certain years that are reducing your benefits. You may be able to cover some living expenses by restoring benefits that are rightfully yours.
Each one of these alternatives may be a better choice depending on your cash flow needs and timing, as well as your inheritance choices. What do you need the money for, and when can you afford to pay it back given your income and expenses? Online calculators can help you run scenarios and compare options.
Consider these alternatives to reverse mortgages – and if you still think a reverse mortgage is best, proceed with the confidence of having done due diligence.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.