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 money is 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 “Ask Stacy: 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
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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.
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Mortgage rates have climbed recently, but are still low by historical standards. 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
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A home equity line of credit (HELOC) has a term — five to 15 years, usually. 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 likely 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 often is tax-deductible. 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 variable, meaning that payments can grow or shrink as mortgage rates change.
- Lenders can close a HELOC and require you to pay it off — for example if your income falls or your home’s value slides.
4. Get a home equity loan
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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 your loan.
- Interest paid is tax-deductible.
- 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.
5. Sell the home to family or friends
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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 percent — 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.