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.