Reverse mortgages can be a good option for many homeowners. They let you borrow based on the equity in your home. Instead of paying the bank, the bank pays you — tax-free — with a series of payments via a partial lump sum of money or a line of credit.
Under the right circumstances, a reverse mortgage loan might help an elderly person stay at home when retirement savings are running out.
Money Talks News founder Stacy Johnson says reverse mortgages can make sense for certain types of people. But they also come with some big disadvantages. For more on the pros and cons of reverse mortgages, check out “Should I Get a Reverse Mortgage?”
If you read that story and decide a reverse mortgage is not for you, it’s probably time to look at other options. If you prefer taking another route, check these alternatives.
1. Sell and downsize
It’s hard to let go of your home, but selling may give you more freedom.
- If you have equity in the home, you’ll probably get more of it from selling than from taking out a reverse mortgage.
- You can use the proceeds from the sale to buy or rent a more affordable home, or to move in with relatives.
- The home is no longer yours.
- You can’t bequeath it to heirs.
Mortgage rates are still at historical lows. If your rate is high now, look into refinancing, which might drop your monthly payment to a more manageable number.
- Fees are typically lower than with a reverse mortgage.
- Your heirs still may be able to inherit the property.
- You must make monthly mortgage payments.
3. Apply for a home equity line of credit
A home equity line of credit (HELOC) has a term — five to 15 years, typically. The first part of the term — 10 years, for instance — is your “draw” period, when you are only required to make interest payments and do not have to pay back the principal.
HELOCs are good options for seniors who want a safety net to cover unexpected expenses in the future. They also can make sense for homeowners at the end of their lives who can enjoy the low-cost draw period but are likely to avoid the increased payments later.
- Fees are lower than with a reverse mortgage.
- You may withdraw money in a chunk or as you need it.
- Interest rates are lower than for a reverse mortgage.
- During the draw period, you can choose to make lower interest-only payments or payments of principal and interest.
- Interest paid may be tax-deductible — if the loan proceeds are used to buy, build or substantially improve the home. The IRS explains the rules at its website.
- You can access only a limited amount of equity. Your loan size is based on your equity and credit profile.
- When the draw period is up, your low interest-only payments end and payments increase. If you miss payments, you risk foreclosure.
- Interest rates are typically adjustable, meaning that payments can grow or shrink as mortgage rates change.
- Watch for harmful lending practices, especially if you have credit problems or are older. The Federal Trade Commission tells what to look for.
4. Get a home equity loan
A home equity loan lets you access some equity in the form of a lump sum. Unlike a reverse mortgage, you repay it in fixed monthly installments over a contracted period. Home equity loans can have a fixed or adjustable interest rate.
- Your home stays in your family as long as you continue repaying the loan.
- Interest paid may be tax-deductible (see No. 3, above).
- You can get a home equity loan with a fixed (stable) interest rate.
- Fees are lower than with a reverse mortgage.
- If you fail to make monthly payments, you could lose your home to foreclosure.
- You can access only a limited amount of home equity.
- Monthly payments of principal and interest are required.
- If you choose an adjustable interest rate loan, your payments can grow.
- You may need to shop around to find lenders offering home equity loans.
5. Sell the home to family or friends
See if loved ones will buy your home, perhaps at a lower-than-market price. This could allow you to stay there and live on money from their payments. There are many ways to do this. For example, sell a portion of the home — 49% — for a lump sum or set up a mortgage with monthly payments to you.
- You can stay in your home.
- The arrangement may help someone you love to buy a home in today’s very tight market.
- Depending on market conditions, your buyer may receive a return on the investment.
- Borrowing money from relatives can trigger family tensions and disputes. Get an attorney’s advice on how to transfer the title and use a formal, binding contract.
- Your family or friends will need sufficient income to purchase the property.
6. Rent to vacationers
Happily for cash-strapped retirees, the sharing economy offers a way to add cash to meager retirement incomes.
- The income can be enough to help you stay in the house, or at least to postpone selling it.
- You get to continue living in your home.
- You must share your home with strangers — not a welcome prospect for everybody.
To learn more, check out VRBO (Vacation Rental By Owner), Airbnb and Homestay, and check out “Do This a Few Days Each Month and Watch Your Mortgage Disappear.”
7. Take in a monthly renter
Renting a portion of your home on a monthly basis may deliver enough income to let you keep your digs. Carefully screen candidates, and get help from a trusted friend if you’re not sure how to do this.
- Seniors, especially singles, may enjoy the companionship.
- Rents are rising rapidly across much of the U.S. If your mortgage payment is low, you might even be able to pay your mortgage from rental income.
- Loss of some privacy and total control over your home.
- You’ll need a degree of savvy to screen candidates for safety, and to manage financial and social transactions.
8. Apply for weatherization assistance
Weatherproofing your home can help you cut your costs.
States — through the federal government — offer weatherization programs that allow people with low incomes to stay in their homes through loans, energy improvements and lower utility bills. States often give preference to people over 60, according to the U.S. Department of Energy, which explains how to apply and has a map with contacts for every state.
Or contact your local Area Agency on Aging (type in your city, state and ZIP code) to learn where to apply, or ask your electricity or heating fuel utility provider.
Plus: Even just delaying getting a reverse mortgage helps by letting you borrow the larger sum available when you are older. Do what you can to put off the decision for a while.
Minus: Even with assistance, you might face some upfront costs before you reap energy savings later.
9. Apply for property tax relief
Many counties and states provide property tax discounts for seniors who meet low-income guidelines. Call your county assessor’s office to learn of any state or local programs that exempt low-income seniors from property tax payments, that let them postpone paying property taxes or that give a partial tax credit.
Plus: You will put money back into your pocket. Who doesn’t like that?
Minus: The amount of money you save can be relatively modest.
10. Take a 401(k) loan or distribution
Perhaps you’re still working and not yet drawing on retirement funds. Look into taking a distribution from your 401(k) plan (no penalty after age 59½) or borrow from it if your plan allows.
Plus: This can be a good option if you do not face penalties for early withdrawals.
Minus: It’s risky to raid your retirement savings earlier in life instead of letting the money continue to compound.