The Top Alternatives To A Reverse Mortgage

Things to Consider Instead of a Reverse Mortgage

The Top Alternatives To A Reverse Mortgage
September 8, 2016

Reverse mortgages are a means of converting the equity in your home to income to use for living expenses or other purposes. They are attractive options for retirees, mainly because there are no monthly repayments. Assuming that the owner pays all taxes and insurance and keeps the home in good shape, repayment does not take place until the owner dies, transfers ownership, or permanently moves out of the home.

However, reverse mortgages are not the only method of extracting money out of your home to meet expenses during retirement. Here are several alternatives to consider.

  • Refinancing – If interest rates are sufficiently low and you plan to stay in your home for a long time, you can refinance and lower your monthly payment, freeing up some cash for other uses. This also keeps the home under your control as an asset, should you wish to leave it to your heirs.

Online calculators are available to help you determine whether refinancing is a good choice for you. You can run scenarios with different loan terms, rates, and closing costs.

If you have owned the home for a long time, your payments may have reached the point where they are mostly principal and little interest. Since you are acquiring a larger percentage of interest payments, refinancing may not be the most economical long-term choice for you.

  • Home Equity Borrowing with Periodic Repayment – You can draw off of your home equity in another fashion with either a home equity loan or a home equity line of credit (HELOC). Both tend to have lower fees than a reverse mortgage. As with refinancing, this keeps the home under your control.

A home equity loan is a lump sum loan secured against the equity in your home, requiring regular monthly interest payments. If you were planning to get a reverse mortgage to pay off an unexpected large expense but would like to pass the home on to your descendants, a home equity loan may be a better choice.

By contrast, a HELOC is similar to a credit card. You can borrow up to a determined limit over the term of the HELOC, and borrow and repay portions of the principal at different times throughout the term of the loan. As you repay principal, your borrowing limit goes up by the same amount, just as with a credit card.

Meanwhile, you make regular interest payments during the term. The main difference is at the end of the term, the principal and all interest is due and must be repaid, either by extending terms, refinancing, or payment in full.

HELOCs are more useful for providing a buffer of emergency funds to use only if you need it, giving you more flexibility.

  • Downsizing – If you are not attached to the home or are having trouble keeping it up, selling the home and downsizing to an apartment or smaller home may be a better option. That way, you receive the equity in your home in one lump sum after the sale.

If you want to keep the home in the family, you can consider selling to one of your children or another family member. You may be able to make the transfer easier by financing the sale – with the family buyer sending monthly payments to you instead of a lender. Treat this as if you were financing a non-family member, with appropriate legal documentation and a provision reverting the title to you in case of default.

A reverse mortgage may still be the best choice for you, but at least consider these alternatives first. They may be better options for you to achieve the same financial goals.


Photo ©iStock.com/SusanChiang

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Carla Truett | 09.08.16 @ 16:26
I would probably take the home equity loan route because of being able to pass our home to our Son. Downsizing isn't really an option for us right now.
Daniel Dohlstrom | 09.08.16 @ 16:37
Reverse mortgages get so much TV ad time people may not really know these options exist, and some may be a much better choice
Christina | 09.08.16 @ 16:42
Good to know about these other ways to get equity money out of your home! Reverse mortgages still seem so sketchy to me!
Zanna | 09.08.16 @ 17:07
I think home equity is a good option for those that are planning to stay in the home longer, and want to be able to keep the home and land for the kids to inherit, rather than having it end up being owned by the bank.
Jane | 09.08.16 @ 17:12
I think downsizing would be my first choice, then refinancing. My grandmother did a reverse mortgage, which enable her to live in her house all her life.
George Middleton | 09.09.16 @ 00:49
I think if you were to pass down the home and land to your children it would be best to go with the reverse mortgage. We were looking into this to make sure our kids will have something to build on.
Victor colon | 09.09.16 @ 04:48
i love the way this article is made it gives you so much information, so you wont fall for false advertisement and other stuff like that regarding mortages.
Rychana Vingia | 09.09.16 @ 22:51
My mother in-law recently downsized. They bills of fixing up her large house was making money tight. Now she is almost completely debt free.
lturtzer | 10.28.16 @ 18:09
Thank you for your article and for including reverse mortgage as an option to help fund/supplement retirement income. It's important for anyone facing an important financial decision to understand all of their options. The government backed home equity conversion mortgage (HECM) loan product--which accounts for over 95% of all reverse mortgage loans -- has been made even stronger through recent policy changes to ensure additional safeguards for consumers. A few points to consider. With a HELOC (home equity line of credit), some borrowers aren't aware that their loans may only allow them to draw from the proceeds for a 10-year period and at the end of that, the draw period may expire or the loan may "reset". During a resetting period, HELOC borrowers may need to pay both their principal and interest, meaning their payments may increase, and they have to plan for this accordingly. A reverse mortgage line of credit works similarly to a HELOC in that the proceeds can be drawn upon, as standby funds when you need them. The difference is the loan doesn't expire or come due until the last remaining borrower passes away or leaves the home, and there are no monthly mortgage payments. The reverse mortgage borrower is responsible for paying their taxes, insurance and for home maintenance. Another important fact is that as long as you maintain your loan obligations, like any home loan, you own the home and it's "under your control as an asset." Further, the reverse mortgage only converts a portion of the home's equity; once the loan becomes due and the heirs sell the home (or they can refi), any remaining equity after paying the loan off is for the heirs. And, a reverse mortgage is a non-recourse loan meaning you never owe more than what the home is worth. Lastly, before submitting applications for a reverse mortgage loan, homeowners are required to go through independent third party counseling to ensure they understand all loan terms and all available options.
$commenter.renderDisplayableName() | 12.11.16 @ 00:51
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