15 Alternatives to a Reverse Mortgage

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Contributor, Benzinga
October 10, 2023

Alternatives to reverse mortgage offer homeowners multiple ways to obtain much-needed funds. The options have benefits and drawbacks. A reverse mortgage lets seniors convert home equity into cash through a lump sum disbursement or monthly payments from the lender to the borrower without periodic repayment of principal or interest as in a regular mortgage — but alternatives to a reverse mortgage exist. Talk to legal and loan professionals before deciding on a reverse mortgage or one of the alternatives covered in this article.

What Is a Reverse Mortgage?

A reverse mortgage is a type of loan available to seniors. The loan allows a homeowner to access their home equity and receive cash from the equity in their home. A reverse mortgage lender does not need to be paid back until the borrower leaves the home or dies. However, reverse mortgages decrease a home’s equity while increasing the amount of interest and fees accrued over time.

Why You Should Consider Choosing an Alternative to a Reverse Mortgage

Alternatives to a reverse mortgage can accommodate a wider range of ages, income stages and equity levels. Selling, downsizing, refinancing or taking out a Home Equity Line of Credit (HELOC) can function as strong substitutes.

15 Alternatives to a Reverse Mortgage

While a reverse mortgage provides borrowers with a predictable stream of funds, it might not be the right choice for every homeowner. Alternatives ranging from refinancing a current home mortgage to applying for a home equity loan allow homeowners to match their needs.

Refinance Your Current Mortgage

Refinancing your current mortgage can improve terms and free up equity, but you need a good credit score and debt-to-income ratio. With a refinance, you are required a minimum amount of home equity that’s lower than the amount required for a reverse mortgage. Choosing a refinance may increase monthly payments, especially if you take cash out.

Apply for a Home Equity Loan

A home equity loan allows you to quickly access funds by borrowing against your home’s current equity. The loan requires higher interest rates and payments. Home equity financing uses your home as collateral, which exposes you to risk.

Take Out a Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a type of secured loan that uses your home as collateral. HELOCs provide a revolving line of credit that offers homeowners the flexibility to fund home improvements.

Sell Your Home to Your Children or on the Open Market

Selling your home can allow you to obtain a competitive market price, leaving you with a comfortable nest egg. Selling your home to your children can help them to establish wealth while providing a legacy to the generation. However, selling a house comes with fees and tax implications.

Downsize Your Home

Downsizing allows you to go from a larger home to a smaller one. The process makes for less upkeep and provides you with the opportunity to move to a more desirable neighborhood. The process of downsizing is time-consuming as well as physically and mentally demanding.

Sell Off Other Assets

Selling off assets such as rarely used vehicles or expensive appliances can create additional funds. The process of selling off other assets occurs when downsizing. Possible downsides include taxes and the task of retitling.

Rent Your Space to Others

Renting your space can bring in a steady stream of income. Research possible renting regulations in your neighborhood before you commit. Renting your space will decrease your privacy and require a level of social interaction, but the cash inflow could be worth the tradeoff. It’s important to find a trustworthy renter to safeguard against unforeseen circumstances such as theft or property damage.

Reduce Your Living Expenses

To reduce your living expenses, examine your spending and set a practical budget. Reducing your costs of living too severely can impact your comfort and sense of satisfaction.

Build Up Your 401(k)

If you have several years before retirement, consider building up your 401(k). A 401(k) is a type of employer-sponsored retirement plan that includes tax breaks and wage contributions. Focusing on a 401(k) will likely be less beneficial for individuals closer to retirement.

Consider Social Security Benefits and Assistance Programs

Examine applicable Social Security benefits and assistance programs. Social Security benefits can include supplemental security income (SSI), which is given to low-income seniors and disabled persons on a monthly basis. Taking Social Security benefits early — before full retirement age — will permanently reduce your monthly benefit.

Apply for Weatherization Assistance

Weatherization assistance helps eligible individuals obtain energy-efficient services. The process of weatherization can initially be costly, but available programs mitigate the costs of improvements. You may not be eligible for weatherization assistance if you exceed the income guidelines.

Purchase an Annuity

An annuity gives retired people a steady stream of income. An annuity is a contract between you and an insurance company that requires the insurer to make immediate or future payments to you. Annuities have fees that you’ll want to consider before you sign on. You buy an annuity by making either a single payment or a series of payments. Annuities are usually used with other long-term focused streams of retirement income and are not suitable for people interested in quickly retiring.

Borrow Against the Equity of Your Life Insurance Policy

Borrowing against your life insurance policy allows you to obtain a loan using the cash value of your policy as collateral. An unpaid life insurance loan will likely lower the provided death benefits or end the policy.

Apply for Property Tax Relief

Property tax relief programs assist with or provide exemptions for property taxes. Tax relief programs usually vary by state.

Consider a Private Reverse Mortgage

Private lenders can provide a personal loan that’s secured by a borrower’s home. Reverse mortgages provided by a private lender are not directly backed by the government.

Explore reputable private lenders to learn about the available loans. Top lenders provide useful housing market news, blogs, accessible calculators and mortgage resources to educate borrowers.

In contrast to private loans, the government offers a reverse mortgage loan called a home equity conversion mortgage (HECM) supported by the Federal Housing Administration (FHA). The FHA-backed loan depends on factors such as a homeowner’s age and current interest rate.

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Opportunities Galore: Alternatives Beyond Reverse Mortgages

Selecting an alternative to a reverse mortgage might seem difficult, but with the right guidance, your selection can provide benefits for years to come. Review alternatives that work with your financial situation and your level of risk tolerance. You can stabilize your nest egg while providing peace of mind.

Frequently Asked Questions

Q

Is there an alternative to a reverse mortgage?

A

Yes. Alternatives include home equity loans, downsizing and selling your house.

Q

When should you consider an alternative reverse mortgage?

A

Consider alternatives to a reverse mortgage when the fees seem cumbersome, you intend to stay in assisted living for over a year or when you plan to sell your home. 

Q

Is a reverse mortgage a good idea for seniors?

A

A reverse mortgage can be a good idea for seniors. However, the decision is a personal choice rooted in an individual’s preference and eligibility. 

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