Alternatives to a reverse mortgage include home equity loan, home equity lines of credit, and cash-out refinances. These financial products can help you tap the equity in your home to use as cash for other purposes. Learn more about the pros and cons to different alternatives to a reverse mortgage.
Key Takeaways
- Alternatives to a reverse mortgages include home equity loans, home equity lines of credit, and cash-out refinance loans.
- A home sale to a family member or friend may be another alternative to a reverse mortgage.
- A reverse mortgage is a type of loan for seniors ages 62 and older that allow homeowners to convert home equity into cash income.
- Reverse mortgages are designed to create retirement income from home equity, but they may not be the best solution for everyone.
How a Reverse Mortgage Works
If you’re age 62 or older, you may be able to convert the equity in your home into cash with a reverse mortgage. This loan lets you borrow against the equity in your home to get a fixed monthly payment, a line of credit, or some combination of the two. Repayment, which includes interest, is deferred until you move out, sell the home, become delinquent on property taxes or insurance, the home falls into disrepair, or you die. Then the house is sold, and any excess after repayment goes to you or your heirs.
Reverse mortgages can be problematic if not done correctly. They require careful attention to the rights of the surviving spouse if you are married or intend to pass the house on to your beneficiaries.
A reverse mortgage ultimately results in you or your heirs not having possession of your home unless you are able to buy it back from the bank. Unscrupulous lenders can also be a risk,so choose a reverse mortgage carefully and only after you have done your due diligence.
Here are several alternatives to reverse mortgages to consider.
1. Traditional Refinance
If you have a mortgage, you may be able to refinance your mortgage to lower your monthly payments and free up some cash. You can use your current lender or a new mortgage lender. One of the best reasons to refinance is to lower the interest rate on your mortgage, which can save you money over the life of the loan, decrease the size of your monthly payments, and help you build equity in your home faster.
Note
Another perk is that if you refinance instead of getting a reverse mortgage, your home and the equity that it builds remain an asset for you and your heirs.
2. Home Equity Loan
Essentially a second mortgage, a home equity loan lets you borrow money by leveraging the equity that you have in your home. It works the same way as your primary mortgage: You receive the loan as a lump-sum payment, and you cannot draw any additional funds from the house.
Previously, interest paid on home equity loans and home equity lines of credit (HELOCs) was tax deductible. However, the 2017 Tax Cuts and Jobs Act narrowed the eligibility for a home equity loan deduction. Through at least 2025, you will not be able to deduct interest on a home equity loan unlessthatloan is used specifically for the qualified purposes described above. It also dropped the level at which interest is deductibleto loans of $750,000 or less.
A home equity loan is generally fixed-rate, which provides security against rising interest rates. Because of that, the interest rate is typically higher than for a HELOC. As with refinancing, your home remains an asset for you and your heirs. Because your home acts as collateral, it’s important to understand that it is at risk of foreclosure if you default on the loan.
3. Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) gives you the option to borrow up to your approved credit limit on an as-needed, or revolving, basis. Unlike a home equity loan, where you pay fixed interest on the entire loan amount whether you’re using the money or not, with a HELOC, you pay interest only on the amount of money that you actually withdraw. HELOCs are adjustable-rate loans, meaning that your monthly payments will change as interest rates fluctuate.
The rules about tax deductibility and qualified purposes are the same asfor a home equity loan described above.A HELOC retains your home as an asset for you and your heirs. Nevertheless, as with a home equity loan, your home serves as collateral and could be foreclosed if you default.
4. Sell Your Home or Downsize
Loan options keep you in your existing home. However, if you’re willing and able to move, selling your home gives you access to the equity that you have built.
This option may be especially appealing if your residence is larger than you currently need, is too difficult or costly to maintain, or has prohibitively expensive property taxes. The proceeds can be used to buy a smaller, more affordable home or place to rent, and you’ll have extra money to save, invest, or spend as needed.
5. Sell Your Home to Family Members
Another alternative to a reverse mortgage is to sell your home to your children or family members. One approach is a sale-leaseback agreement, in which you sell the house and then rent it back using the cash from the sale. As landlords, your family member will get rental income and will be able to take deductions for depreciation, real estate taxes, and maintenance.
Another approach is a private reverse mortgage, which works like a reverse mortgage except that the interest and fees stay in the family. Your family member makes regular payments to you, and when it’s time to sell the house, they recoup their contributions (and interest).
It’s not free to set up this type of arrangement, but it is typically much cheaper than getting a reverse mortgage through a bank, and the home remains an asset for you and your children. Selling to your children or family members has tax and estate planning ramifications, so it’s important to work with a qualified tax specialist or attorney.
6. Sell Off Other Assets
If the primary reason why you are considering taking out a reverse mortgage is to access cash, then you may be able to access cash cheaper via other means. You may have other assets that you can sell.
If you have a car that you are no longer using very frequently, look into transportation programs for seniors in your area and determine if selling your car may be right for you. If you have other assets like boats, collectibles, recreational vehicles, etc., that you are considering passing down to your heirs, sit down with them and do some estate planning to determine if they would rather have the house or the other assets.
If you have stocks, bonds, or real estate investments, it is a good idea to sit down with a financial planner to determine if selling those off to access cash could be a better financial choice than paying the fees associated with a reverse mortgage.
Frequently Asked Questions
What Makes Someone a Good Candidate for a Reverse Mortgage?
A reverse mortgage may be right for you if you have lots of equity in their home, you have limited income in retirement, and you don’t want to leave your house to your heirs (or you have heirs who can pay off the reverse mortgage when the homeowner passes.)
Who Should Not Get a Reverse Mortgage?
Anyone who wants to give their home to their heirs or to charity should not get a reverse mortgage. Reverse mortgages have relatively high fees, so people who are able to get home equity loans, home equity lines of credit (HELOCs), or refinances with better terms can also look into alternatives to a reverse mortgage.
How Do You Repay a Reverse Mortgage?
You only have to repay a reverse mortgage if you sell the home, pass away, or reside outside the home for more than a year. Generally, your heirs will repay the reverse mortgage with their own funds or through some sort of refinance on the property.
The Bottom Line
Reverse mortgages may be a good option for people who are house rich and cash poor, with lots of home equity but not enough income for retirement. However, there are other options that allow you to tap into the equity that you have built up in your home.
Before making any decisions, it’s a good idea to research your options, shop around for the best rates (where applicable), and consult with a qualified tax specialist or attorney.
