Alternatives to a Reverse Mortgage

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Alternatives to a Reverse Mortgage

Using the equity in your residence is a method that many people use to raise cash. A homeowner may use several methods to tap into this income vein, but some may be better suited than others.

One popular option—which often fills the airwaves with commercials—is the reverse mortgage. While popular, however, this may not be the best choice for many homeowners. Here, we consider some alternatives.

Key Takeaways

  • For seniors 62 and over, a reverse mortgage is a sort of financing that enables homeowners to turn their home equity into cash flow without having to make monthly mortgage payments.
  • Although these products are intended to use home equity to provide retirement income, they may not be the best option for everyone.
  • Traditional cash-out mortgage refinances, second mortgages, and sales to family members are a few alternatives you may want to think about.

Reverse Mortgage

If you’re 62 years of age or older, you may be eligible to use a reverse mortgage to turn the equity in your house into cash. With this loan, you may get a set monthly payment, a line of credit, or a combination of the two by borrowing money against the equity in your house. Repayment is put off until you vacate the property, sell it, fall behind on your insurance or property taxes, the house starts to break apart, or you pass away. Following repayment, the home is sold, and any proceeds belong to you or your heirs.

Reverse mortgages may be difficult if done incorrectly, so if you’re married or want to leave the property to your beneficiaries, you should pay close attention to the rights of the surviving spouse.

In the event that you are unable to repurchase your house from the bank, the procedure’ conclusion always results in you or your heirs losing ownership of it. Risks associated with dishonest lenders should also be considered, so choose this option wisely and only after doing your research.

1. Refinance Your Existing Mortgage

You may be able to refinance your mortgage if you already have a house loan in order to lessen your monthly payments and free up some cash. Lowering your mortgage’s interest rate is one of the greatest reasons to refinancing since it will save you money over the course of the loan, reduce the amount of your monthly payments, and hasten the process of increasing your home’s equity.

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Another benefit is that your property and the value it builds up remain an asset for you and your heirs if you refinance rather than applying for a reverse mortgage.

2. Take Out a Home Equity Loan

A home equity loan, which is essentially a second mortgage, enables you to borrow money by using the equity in your house. It operates in the same manner as your principal mortgage: You get the loan as a single lump sum payment, and you are not permitted to borrow further money against the home.

Interest on home equity loans and lines of credit (HELOCs) was formerly tax deductible. The 2017 Tax Cuts and Jobs Act, however, limited who may claim a home equity loan deduction. You won’t be allowed to deduct interest on a home equity loan for tax years beginning in 2018 through at least 2025 unless the loan is utilized solely for the above-mentioned eligible uses. Additionally, it lowered the threshold at which interest on loans of $750,000 or less is tax deductible.

A home equity loan often has a fixed rate, which offers protection from increasing interest rates. The interest rate is often greater than it would be for a HELOC as a result. Your house continues to be an asset for you and your heirs, just as with refinancing. Since your house serves as collateral, it’s critical to be aware that it might be foreclosed upon if you fail to make your loan payments.

3. Take Out a Home Equity Line of Credit (HELOC)

With a home equity line of credit (HELOC), you have the flexibility to borrow money as required or on a revolving basis up to your authorized credit limit. With a HELOC, you only pay interest on the amount of money that you actually withdraw, as opposed to a home equity loan where you pay set interest on the full loan amount whether you use the money or not. HELOCs are loans with adjustable rates, so if interest rates change, so will your monthly payments.

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The guidelines for a home equity loan outlined above apply to tax deductibility and eligible uses as well. Your house is kept as an asset for you and your heirs thanks to a HELOC. However, just as with a home equity loan, your house is used as security and might be foreclosed upon if you fall behind.

4. Sell Your Home or Downsize

You can stay in your current house if you choose the aforementioned alternatives. However, selling your house offers you access to the equity you have accumulated if you’re ready and able to relocate.

This alternative can be particularly enticing if your home is bigger than you now need, requires too much upkeep or is too expensive to maintain, or has high property taxes. You may rent or purchase a smaller, more inexpensive property with the money earned, and you’ll have additional cash to save, invest, or utilize as you see fit.

5. Sell Your Home to Your Children

To avoid a reverse mortgage, you may sell your house to your kids. A sale-leaseback deal is one strategy, where you sell the home and then rent it back with the proceeds of the sale. Your kids will be able to deduct maintenance, real estate taxes, and depreciation as landlords and get rental revenue.

A private reverse mortgage is an alternative strategy; it functions similarly to a reverse mortgage but keeps the interest and costs within the family. Your children pay you on a monthly basis, and when it comes time to sell the home, they repay back their payments (and interest).

Setting up this kind of arrangement isn’t free, but it’s usually far less expensive than obtaining a reverse mortgage from a bank, and the house still belongs to you and your children. Working with an experienced tax consultant or attorney is essential since selling to your children might have tax and estate planning implications.

6. Sell Off Other Assets

If accessing money is your main motivation for pursuing a reverse mortgage, you may be able to do it more affordably via another route. There might be further assets you have to sell.

Whether you own a vehicle that you don’t use very often, research local senior transportation programs to see if selling your car would be a good option for you. Whether you are contemplating leaving your heirs other assets, such as boats, collectibles, recreational vehicles, etc., sit down with them and perform some estate planning to see if they would prefer to inherit the home or the other things.

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Sit down with a financial advisor if you hold stocks, bonds, or real estate assets to see whether selling them to get cash could be a better financial decision than having to pay the costs for a reverse mortgage.

What makes someone a good candidate for a reverse mortgage?

The ideal candidates for a reverse mortgage are those who have substantial equity in their homes, limited retirement income, and either don’t want to leave their homes to heirs or have heirs who can repay the reverse mortgage after the homeowner’s passing.

Who should not get a reverse mortgage?

A reverse mortgage is not advisable for someone who intends to pass their house free and clear to their heirs or a charitable organization. People who qualify for home equity loans, home equity lines of credit (HELOCs), or refinances with better terms should also look into alternatives to reverse mortgages because of the comparatively high costs associated with them.

How do you repay a reverse mortgage?

Repayment of a reverse mortgage is only necessary in the event of house sale, death, or prolonged absence from the property. Typically, your heirs will refinance the property or use their own money to pay off the reverse mortgage.

The Bottom Line

If you have a lot of home equity but not enough money for retirement, reverse mortgages may be a smart alternative for you. There are other possibilities, too, that let you use the equity you’ve accrued in your house.

Research your alternatives, shop around for the best deals (where appropriate), and speak with an experienced tax expert or attorney before making any decisions.

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