Alternatives to a Reverse Mortgage
A reverse mortgage can be a great way for senior homeowners to tap into their equity and draw cash for a variety of purposes. Whether you want to supplement your retirement income, need help paying for medical bills, want to pay off debt or help fund your grandchild’s college education, a reverse mortgage is just one of many options available for generating cash from your home’s equity. However, before you commit to a reverse mortgage, make sure you fully understand the obligations and terms that are set out within the loan agreement, and take the time to explore the alternatives. In this post we’ll go over a few of these alternatives to help you make an informed decision about reverse mortgage financing.
First, let’s go over the basics of a reverse mortgage:
Reverse mortgages are a unique type of home financing in which the homeowner does not have to make payments to their lender; instead, the lender pays them, usually in either a lump sum or in regular installments. In most cases, the homeowner gets to keep their house, collect the proceeds and use them at their discretion. However, unlike a typical mortgage, where the amount owed decreases over time, the balance on a reverse mortgage goes up over time. The loan does not need to be repaid until the last surviving person on the loan either moves or passes away.
There are many benefits associated with reverse mortgages. However, they may not always be the best choice in every scenario. They also are only available to borrowers age 62 or older.
If you do not qualify for a reverse mortgage, or if you would like to learn about the other options available, you may wish to consider the following four alternatives.
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Home Equity Line of Credit (HELOC)
Home Equity Lines of Credit are a lot like credit cards. They allow the borrower to draw money from their home equity by writing a check or using a credit card connected to the account. Borrowers can take out money as needed, in any amount they desire (as long as it doesn’t exceed the limit on the loan). Since a HELOC is a line of credit, the borrower only has to make payments on the amount they actually owe, not the full amount that is available.
Note: A line of credit is one of the options for receiving the proceeds of a Reverse Mortgage, so this may be a good option for seniors interested in a line of credit but concerned about taking on another monthly payment.
2. Refinance Your Current Mortgage
If you just need a litttle extra each month to get by, you may want to consider refinancing your current mortgage. By refinancing you may be able to lower your monthly payment either by taking out a new loan with a lower interest rate than the one on your current mortgage, or by extending the loan term and repaying the mortgage over a greater number of monthly installments. The money that you save can be used for other expenses, or saved for emergencies or large expenses you anticipate having in the future.
Another option would be to apply for a cash-out refinance. In a cash-out refinance, the borrower refinances their mortgage for more than what they owe on it, and is able to pocket the difference. The cash they receive can be used for anything they like, be it debt consolidation, putting the money toward a grandchild’s education, or paying off a major medical bill.
3. Sell Your Home
If you’ve built up a considerable amount of equity in your home, and the current market value is much higher than what you currently owe, selling your home may be the best option for quickly generating a lump sum of extra money. This could be an especially good option for a homeowner who is looking to downsize and does not want the burden of owning and maintaining a large home anymore.
If you prefer to keep your home in the family, you could also consider selling the home to your children. It’s not uncommon for parents to sell properties to their children below market value or even to “owner finance” the sale of the home, meaning that the buyer would make monthly payments directly to the seller rather than taking out a mortgage with which to purchase the property. While it’s noble and natural to want to help family members you care about, be sure to consider whether you can truly afford to do so. Don’t be so generous that you put your ability to support yourself in jeopardy.
Learn more about how people are using home equity conversion mortgages for purchasing homes:
Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.