We recently wrote a blog post about reverse mortgages and why they’re a popular choice for some homeowners who are 62 years of age or older. But if you’re unsure about this type of mortgage, or if it’s just not the right choice for you, we’ve got some reverse mortgage alternatives for you to consider as you explore your options. Of course, in the brief space below, we aren’t able to fully explore all potential pros and cons of the various reverse mortgage alternatives. Be sure to fully vet any of these options (including with legal and financial advisors, as needed) before making a decision.
Refinancing your existing mortgage may work well if you’re looking to lower your monthly mortgage payment. Although you’d still be making a monthly mortgage payment, you could reduce your payment if you lower your interest rate. If you’d like to shorten your remaining loan term, this also may be possible by refinancing your existing mortgage. Although, in the past, it may have been difficult for seniors to qualify for a refinance because of their limited income, 401(k)s, IRAs, and other assets can often now be counted to help you qualify.
A cash-out refinance is when a borrower refinances their mortgage for more than the amount they currently owe and receives the difference in cash. Like a reverse mortgage, this type of refinance allows you to borrow against your home’s equity and spend the proceeds as cash. Although a cash-out refinance is similar to a reverse mortgage, homeowners must have qualifying income to obtain a cash-out refinance.
If your goal is to get cash from your home’s equity, selling your home might be a viable option. In fact, you may even get more money back from selling your home than you would by taking out a reverse mortgage. If the time is right and you’re ready to sell, consider downsizing—a smaller home may come with a smaller monthly mortgage payment, leaving you with more money in your pocket to pay other expenses.
Here’s a scenario: You have a friend or family member who is willing to buy your house from you. If this is someone you trust and have a good relationship with, you could set up an agreement to continue living there while they own and pay for the house. This arrangement can be especially attractive to older couples with grown children who are looking to purchase a home for their young families (and would like to have the multi-generational family live together). However, it’s very important that you seek professional advice before pursuing an agreement like this, seeing as it involves transferring your title, a binding legal contract, and doing business with family.
A home equity line of credit (HELOC) is another type of loan where you can borrow against your home equity and use that to pay miscellaneous expenses. It’s unique, though, because the cash may be advanced to the borrower via a line of credit—much like a credit card—rather than in a lump sum. In many cases, closing costs on HELOCs may be lower than other mortgages. Interest rates generally are variable, meaning that they can go up or down. The interest paid on a HELOC may be tax-deductible, and during the “draw” period of your HELOC, you may be able to opt to pay for the interest alone each month (and not include principal in your monthly payment until after the expiration of the draw period).
Like a reverse mortgage or a HELOC, a home equity loan allows you to access some of the home equity you’ve built up. But in this case, you receive the funds in a lump sum. Over a contracted period of time, you would repay a home equity loan in fixed monthly payments and this type of loan may either have a fixed or adjustable interest rate. Homeowners choose home equity loans because they get to keep their home while they’re repaying the loan, the interest they pay may be tax-deductible, and fees may be lower than those of a reverse mortgage.
If you’re cash-strapped, flipping your home into an investment property could benefit you greatly. You could rent out a room, a floor, or the whole place from time to time and make a little extra from tourists and vacationers. This option works for many retirees who are still living in the “family home” and have a lot of unused space. Keep living in your home, make a little money on the side, and enjoy the company of visitors! However, this option, like all others, may not be the best for all homeowners and we suggest you discuss it with family or friends, as well as legal and financial advisors, first. (In some cases, using your home as an investment property may not be permitted. For example, your existing mortgage, local government, or homeowners association may prohibit it.)
Similar to renting out your home to vacationers and other visitors, getting a roommate can help offset some of the costs of living. This also may be a great alternative for a retiree who’s coping with the loneliness associated with the loss of a spouse. And with rent rates rising across the country, this extra income from your roommate may be enough to cover (or largely offset) your monthly costs. In this situation, though, it’s best to carefully screen your candidates and perhaps get some help from a friend, one of your grown children, and/or legal or financial advisors. (In some cases, renting a portion of your home may be prohibited, for example, by your mortgage, local government, or homeowners association.)
Look into your tax benefits because, depending on your state or county, you may qualify for a little tax relief! If you meet low-income requirements, you may be eligible for a partial tax credit or programs that allow you to postpone or forego property tax payments. While this isn’t a loan or line of credit, it may be a way to keep a little more cash in your pocket.
There are so many other programs and benefits out there that can help retirees reach a better financial place and take full advantage of retirement. Many VA programs exist to help veterans and surviving spouses, Medicaid programs are available to assist those with disabilities or medical needs, and even more money-saving assistance programs can be found at BenefitsCheckUp. You don’t know what’s out there until you do a little research.
These are just a few reverse mortgage alternatives that may help retirees. Talk to your professional financial advisor and/or legal counsel before you make such an important decision—they will be able to help you choose the best option for your unique situation.