5 Alternatives To A Reverse Mortgage
March 30, 2023 8-minute read
Author: Lauren Nowacki
*Rocket Mortgage® does not offer reverse mortgage loans.
According to the Insured Retirement Institute, 51% of older workers have less than $50,000 saved for retirement. Even if you have saved for retirement, the higher living costs and potential medical costs could leave you searching for a way to supplement your income.
Many seniors in this position may find a solution with a reverse mortgage, a loan specifically for senior homeowners that can help provide the money needed to live a comfortable retirement. But these types of loans aren’t suitable for everyone, and it’s important to know the other options you may have if you’re seeking this type of financial assistance. Before we explore the alternatives to a reverse mortgage, let’s first take a look at the loan, who may benefit from one and why you may want to consider other solutions.
What Is A Reverse Mortgage?
Reverse mortgages are loans for homeowners aged 62 and older that allow them to convert their home equity into cash. The loan first pays off their mortgage, and the rest of the money is used however the homeowner wants. While the homeowner must continue to pay their property taxes and homeowners insurance, they won’t have to make another mortgage payment until they sell the home, move out or pass away.
The qualification requirements for a reverse mortgage include the following:
- You must be 62 or older.
- You must have enough equity in the home.
- The home must be your primary residence.
- If you get a home equity conversion mortgage (HECM), which is the government-insured reverse mortgage, you’ll need to attend a counseling session and undergo a financial assessment.
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Pros And Cons Of A Reverse Mortgage
Before deciding whether a reverse mortgage is a suitable option, it’s important that you weigh all its benefits and drawbacks.
There are several reasons a person may get a reverse mortgage, including:
- Eliminating their monthly mortgage payment, while still paying property taxes, insurance and home maintenance
- Consolidating their debts
- Making home improvements
- Supplementing their income
- Increasing their savings
- Paying for in-home care
While these types of loans can be helpful financial tools in retirement, they also come with drawbacks. Here’s a few to seriously consider:
- These loans often come with higher costs, including counseling fees and greater closing costs.
- If you don’t continue to pay your property taxes and homeowners insurance and maintain the home, you could lose your home.
- The loan could impact your ability to qualify for such government programs as Medicaid or Supplemental Security Income (SSI). You should talk to a financial advisor if you receive these benefits.
- These loans are complicated and come with risks. It’s important to understand them fully.
- Because these are complicated loans, they are often used in financial scams that prey on seniors.
Because of the drawbacks of these loans, it’s a good idea to consider the alternatives to a reverse mortgage for seniors.
5 Reverse Mortgage Alternatives
If you’re thinking of getting a reverse mortgage to supplement your income, save money, pay for care, consolidate your debts or make home improvements, there are other ways to reach those goals.
1. Sell And Downsize Your Home
One of the reasons homeowners get a reverse mortgage is because it can help them stay in their homes. But if that’s not your main goal, you may want to consider downsizing to a smaller home. Selling your home is another way to access home equity. And, if you purchase a less expensive home, you could use some of your proceeds for the purchase and keep the remaining money.
There are other advantages to downsizing. You’ll have less home to clean, heat, cool and maintain. You may also pay fewer property taxes, depending on the home and area you move to.
In some situations, a good option may be to arrange a sale-leaseback agreement with a family member, which means that you’ll sell the home to a family member with the intent of leasing it back from them. With a sale-leaseback agreement, you can rent your home with lump-sum earnings, or you can pay your family member in monthly installments.
2. Refinance Your Current Mortgage
You could choose to refinance your mortgage to lower your monthly payments or change your loan term. If you refinance when rates are low, you could get a lower interest rate than your original mortgage. With a lower interest rate, your monthly payment could go down, providing you more money each month. If you’re thinking about getting a reverse mortgage to get rid of your mortgage payment, consider refinancing for a shorter term. You’ll pay more each month, but you’ll pay the loan off faster and own your home free and clear sooner.
If your goal is to supplement your income, you could do a cash-out refinance, which allows you to borrow against the equity in your home, just like a reverse mortgage does. However, a cash-out refinance won’t take away your monthly mortgage payments. You’ll need to pay on the loan each month.
3. Take Out A Home Equity Line Of Credit (HELOC)
A Home Equity Line of Credit, or HELOC, is a second mortgage that provides access to your home equity through a line of credit. It works the same as a reverse mortgage line of credit – instead of receiving your proceeds in a lump sum, they’re put into a line of credit that you may continuously borrow from up to a certain limit. It’s kind of like a credit card. And since they’re like a credit card, HELOCs should be used with caution. It’s important to remember that the money you borrow is a loan against your home’s equity and it must be paid back at the end of the draw period. If you can’t make payments on the loan when the time comes, you could lose your home.
These types of loans can be helpful if you want to consolidate your debts, make improvements to the home or need a large sum of cash for another expense.
Rocket Mortgage does not offer HELOCs.
4. Apply For A Home Equity Loan
Another type of second mortgage is the home equity loan, which allows you to borrow from the equity in your home. The difference between a home equity loan and HELOC is that your proceeds are provided in a lump-sum payment instead of a line of credit. That means the lender will give you the entire loan amount in one payment after you close the loan. This type of loan is very similar to reverse mortgages that are paid with one lump sum payment. Unlike the reverse mortgage, which doesn’t require you to make monthly payments, a home equity loan will require fixed monthly payments throughout the life of the loan.
Remember, this option also requires you to put your house down as collateral, which can be risky. If you can’t make your monthly payment, you could lose your home.
Rocket Mortgage® is now offering The Home Equity Loan, which is available for primary and secondary homes.
5. Rent Your Space To Others
If you’re looking for ways to supplement your income or cut living expenses and have space in your home to share, you could consider renting out space in your home. How you choose to rent is up to you. You could rent out a room with shared common areas or space with no shared areas. You can also choose to do long-term renting or offer short-term options, like renting a room or your whole home to visitors through online rental marketplaces like Vrbo or Airbnb. This practice, known as house hacking, creates an extra income, which you can use toward living expenses or other needs. If you have a long-term renter, you could also cut living expenses by splitting utility bills for things like electricity, heat, cable and internet or including the costs in the rent.
Other added benefits of renting your space are that you could have companionship and it could add an element of safety and possible care when needed. However, it’s important that you take your safety into consideration – both physical and financial – and run background and credit score checks on potential renters. You’ll also want to follow all the correct legal steps if you choose to rent a space in your home, including drawing up the proper paperwork and updating your insurance policy.
Steps To Take Before Committing To A Reverse Mortgage Alternative
Whether you choose to get a reverse mortgage or go with an alternative, you’re still making a big financial decision. And with any financial decision, you should make sure you educate yourself on all your options and the product of your choosing to take the necessary step of protecting yourself and your financial future. Here are a few things to do no matter what you decide:
- Determine your home equity. It’s important to evaluate your amount of home equity before taking out a new loan or refinancing. You’ll want to have an idea of how much you can borrow and that you have enough equity to get the loan you want.
To determine your home equity, simply subtract your loan balance (how much you owe) from your estimated home value. For example, if your home is worth $200,000 and your loan balance is $100,000, you have $100,000 equity in the home.
- Shop around for the best rates. It’s essential to shop around for the best rates and loan terms. Different lenders offer different types of loans. They may have different credit and other qualifications and they may charge different fees. These factors could make a difference in the amount you pay each month. Get quotes from a few different lenders before landing on one.
- Consult with a qualified professional. It’s wise to consult with a qualified real estate attorney, tax specialist or financial advisor before moving forward with a loan or refinancing. They’ll be able to dig more into your financial situation and retirement goals and make recommendations custom to your life. They’re also knowledgeable in finance and real estate, can make the complex stuff easier to understand and spot scams.
The Bottom Line: Consider All Available Options
Reverse mortgages can be a useful tool in retirement by allowing access to home equity and eliminating the monthly mortgage payment, providing more money each month. However, they can be complex loans, and it’s important that the client understands they must continue to pay their property taxes and homeowners insurance and maintain their home. These types of loans are not for everyone, so it’s important to know that you have other options. These alternatives to a reverse mortgage include downsizing, refinancing your current loan, getting a second mortgage that allows you to borrow money against the equity in your home or renting space in your current home.
If you’re interested in refinancing your current loan, start today with Rocket Mortgage.
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