Putting Your Retirement Income to Use
A reverse mortgage is a common mortgage option among homeowners in the United States. The financial agreement allows elders who are 62 and older to borrow money to supplement their retirement income.
However, the loan type requires them to use their home as collateral. So, not everyone fancies a home loan. At the same time, a reverse mortgage may only be ideal for some. This article explores reverse mortgage alternatives you can consider to make the most of your home loans in the US.
What is Reverse Mortgage?
Before we delve into the reverse mortgage alternatives, it's imperative to understand what reverse mortgage is and their pitfalls.
A reverse mortgage is a home loan. The mortgage plan allows you to borrow money, but not in the same way as a home purchase loan. To be eligible for a reverse mortgage, a homeowner must be 62 years or older and have enough equity in their primary home used as collateral for the loan.
If successful, a reverse mortgage pays the homeowner a lump sum, usually a fixed monthly income or a line of credit. According to federal regulations, the loan amount also doesn't exceed the home's value. The good part is that if it does, the borrower isn't liable to pay the difference to the lender.
However, the downside to a reverse mortgage is that it doesn't require any loan payments during the homeowner's lifetime. Instead, the lump sum of the loan balance is due and payable after the borrower passes on, moves out of the home permanently or sells the property.
This makes a reverse mortgage a terrible financial decision for many homeowners. Especially those who have heirs inheriting the estate. At the same time, not everyone can access the loan because the minimum age requirement is 62 years.
So, what are the alternatives to a reverse mortgage?
1. Refinance Your Home
One of the most viable reverse mortgage alternatives is home refinancing. This simply means adjusting your current mortgage to reduce your monthly payments and provide you with extra cash.
In other words, you can refinance your mortgage by reducing its interest rate and cash out the difference to augment your monthly income or add to your savings. Doing this can help you save more money over the loan lifespan and reduce your monthly payments.
In turn, you'll be able to build home equity more quickly. And your home and equity built remain valuable for you and your offspring.
2. Refinancing for Cash Loans
Refinancing for cash loans involves taking out a new loan to pay off an existing loan and receiving cash back in the process. This type of refinancing can be beneficial for those who need quick access to cash, but it's important to understand the terms and fees involved before proceeding. It's important to shop around for the best rates and terms, as well as to consider the impact on your credit score. Refinancing for cash loans can be a useful tool for managing debt, but it should be approached with caution and with a clear understanding of the potential costs and benefits.
3. Get a Home Equity Loan
If you currently have a mortgage on your home, another considerable alternative to a reverse mortgage is a home equity loan. As the name implies, this type of loan allows you to borrow money by using the equity in your home as leverage.
Like a primary mortgage, you receive the loan as a lump sum from your mortgage provider, but you can't access additional funds using the property.
The good part about a home equity loan has a fixed rate, which means you are secure despite the incessant interest rate hikes. However, you risk home foreclosure if you default on the equity loan.
4. Sell or Downsize the Property
Another way to make the most of your home without a reverse mortgage is to sell or downsize the house. This is particularly advisable if you have plans to move out of the property and not live there. And it gives you access to the equity you have built in the home over time.
Another category of people who can leverage this option is homeowners without kids or a need for a large residence. This is because massive apartments are more difficult and costlier to maintain. They also incur higher property taxes that can be avoided.
So, when you sell your bigger house and get a smaller one or reduce its size, you'll have extra cash to spend, save or invest.
5. Sell the Home to Family or Friends
Selling your home is another way to avoid a reverse mortgage. If you still intend to live in the house, you can sell it to friends or family. For instance, you can sell to your kids through a sale-leaseback agreement and rent it back after the sale is completed.
This way, you'll have enough money to pay rent to your kids (the new owners), and as landlords, they'll enjoy rental income.
Alternatively, you can sell a part of the house to them for a lump sum and use the funds however you desire.
6. Raise Money from Other Assets
Instead of opting for a reverse mortgage to access more money, you can sell off other valuable assets. For example, you can sell your extra car(s) or other valuables that no longer serve you.
If you also have valuable items that you intend to pass down to your friends and family, you can discuss with them to determine which they consider more valuable between the house and other assets.
Selling these items will offer you cheaper access to more money, and you'll be making a better financial choice.
7. Open a Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) is another loan type that allows you to use your house as collateral. This loan type lets you borrow an amount up to your approved credit limit.
The good part about HELOC is that it's a cheaper alternative to a reverse mortgage or a home equity loan. Unlike a home equity loan, where you pay a fixed interest rate regardless of whether you use the money, a HELOC charges you interest on only the money you withdraw. For example, if you have a $200,000 HELOC, you don't pay any interest until you draw on it.
However, like home equity loans, you can lose your property if you default on HELOC payments.
Final Thoughts
Reverse mortgages are decent financial options for seniors with a high home equity but a low retirement income. However, because of the downsides, including leaving a massive debt to your offspring, we've highlighted some alternatives to reverse mortgages.
You must do due diligence and find the best option for you. And consulting qualified tax attorneys or specialists is a good way to start.