With a regular mortgage, you make payments to a bank or other lender in order to acquire more equity in your home until, ideally, you have ultimately purchased 100 percent equity in your home. With a reverse mortgage, you receive payments from the bank or another party in exchange for the equity you have already built up in your home. The benefit of reverse mortgages is they provide you needed money to sustain yourself through your retirement years.
The downside of reverse mortgages is you increasingly give up equity in your home. If you live longer than planned, then you could lose your home. If you die and leave your spouse behind, then your spouse could outlive the equity and get kicked out of the home. Even if you both pass away before payments run out, you no longer have the home or its former equity to leave to your heirs. Fortunately, there are better options available to those with equity in their homes who want or need to bring in more money somehow.
Refinancing
Do you have trouble making your mortgage payments, thinking a reverse mortgage will solve your problem? If so, then consider refinancing your mortgage to one with lower monthly payments. This allows you to free up a bit more cash each month while still increasing, rather than decreasing, your ownership of your home. You also continue to ensure you get to stay in your home and leave it to your heirs when you die.
Home Equity Loan
You do not have to sell back the equity you worked so hard to build up in your home to make use of it for needed cash. You can simply take out a home equity loan, or “second mortgage,” on the money instead. Compare lenders and look for the best terms with the lowest interest rate. With equity built up in your home, you can likely have lenders competing for your business. If your credit is decent, then you can command an even lower rate and better repayment terms. Make sure the repayments on the loan fit within your budget and do not counter the very savings you reap by taking out the home equity loan to begin with.
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Be sure to pay heed to the tax implications of a home equity loan in your decision as well. Between the years 2018 and 2025, interest on a home equity loan is not tax deductible unless the loan is for no greater than $750,000 and you apply the funds from the loan directly to buying, building or substantially improving the home after securing the loan. After 2025, unless the individual home equity loan provisions of the Tax Cuts and Jobs Act are made permanent, you can deduct up to $100,000 of a home equity loan from your taxes, regardless of how the loaned money is used.
Home Equity Line of Credit
If you do not need a lump sum of money up front, then you can pay even less to borrow against the equity in your home by taking out a home equity line of credit, known as HELOC for short. Based on factors including the equity in your home, the home’s value and your credit, you are given a credit limit against which you may borrow funds as you require.
You only pay interest on the money you actually borrow. You are not obligated to pay interest on the remaining portion of your credit limit left untouched. Unlike home equity loans, for which interest rates are fixed, HELOCs have adjustable rates that fluctuate with the market. Under most conditions, adjustable rates are lower than fixed rates. Tax deductibility rules for HELOCs are the same as for home equity loans.
Note: all of the alternatives to reverse mortgages listed so far—refinancing, home equity loan and home equity line of credit—use your home as collateral, meaning your home could go into foreclosure if you default.
Selling and Downsizing
Rather than borrow against the equity in your home, you could sell your home and earn the money without requiring repayment. The only catch to selling your home for the equity in it is you have to find somewhere else to live instead.
If you can move in with your kids or other family, then you can keep all or most of the gains. If not, then you can still retain some of that money for other needed purposes by downsizing to a smaller, less expensive home. The difference between your former mortgage payment and your new mortgage or rent payment is extra money in your pocket each month to use however you want.
Selling to Your Kids
If you do not wish to scale down your lifestyle or do not wish to leave your home, then you could still sell it. Just sell it to your children under the stipulation they let you remain living in it until you pass away. A way of formalizing this arrangement is with a sale-leaseback agreement. In such a deal, you sell your home and rent it using proceeds from the sale. Your children (or the buyers, if not your kids) become your landlords receiving your rental income. As such, they can take tax deductions for maintenance, real estate taxes and depreciation.
Bankruptcy
If you fail to even qualify for a reverse mortgage, then a final option to consider is bankruptcy. However, be aware that while bankruptcy is always an option, it should be last resort only to pursue when no other alternative is available to get you out of a pressing financial pickle. With bankruptcy, you can at least generally remain in your home and you either eliminate your debt or consolidate it into a smaller monthly payment, depending on the type of bankruptcy you pursue.
With bankruptcy, you also know you eventually have more cash available to help you cover your monthly expenses. On the negative side, your credit score takes a big hit when you declare bankruptcy and the event remains a stain on your credit history for 10 years thereafter. As such, it can be harder to take out any future loans, and any loans for which you can qualify generally charge much higher interest. In addition, the process of filing for bankruptcy can cost a lot of money, such as in lawyer and court fees, only adding to your debt burden.
Related Article: Retiring Well in the United States
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