What Are Some Alternatives to a Reverse Mortgage?

Photo Courtesy: Pranithan Chorruangsak/iStock

Reverse mortgages allow homeowners ages 62 and up to tap their home equity for a variety of purposes. Some use these funds to supplement Social Security retirement income or money from other retirement plans, making it easier to retire comfortably. Others use the funds for home improvements to make aging in place easier or to achieve specific financial goals.

However, reverse mortgages aren’t the only option for retirement income. Here’s a look at some alternatives to a reverse mortgage.

Refinancing a Conventional Mortgage

By refinancing a conventional mortgage, you can financially benefit in several ways, depending on the option you select. If you simply refinance what you owe, you could potentially get a significantly lower payment by extending the repayment term, securing a lower interest rate, or both.

With a cash-out refinance, you can tap your equity for nearly any purpose. Whether you want to consolidate debt, fund home improvements, functionally boost your income, or create a cash buffer for emergencies, it may be on the table.

Selling Your Home

Generally, a reverse mortgage is best for homeowners who prefer staying in their current house, essentially letting them age in place. However, if you aren’t concerned about remaining in a specific property, selling your home may be worth considering.

When you sell, you’ll receive the equity as cash. Then, you can use it to purchase a smaller home if you’re interested in downsizing. Additionally, you could use the funds to shift into a rental, assisted living facility, or something similar.

In some cases, selling doesn’t just let you capture your equity; it also leads to reduced expenses. If you downsize, ongoing maintenance is potentially lower, and your property taxes and insurance might go down. If you go with a rental, maintenance and property taxes aren’t on your shoulders, and renter’s insurance is usually cheaper than homeowner’s, even if the house or unit is similarly sized.

Getting a HELOC

With a home equity line of credit (HELOC), you essentially end up with a second mortgage that lets you tap your equity as you need it. Functionally, it’s similar to a credit card. During the draw period – which typically lasts 10 years – you can withdraw funds. Additionally, during that time, the payments are interest-only, though you can choose to pay more. If you do pay beyond the interest, you can reuse the repaid amount again if you want.

Once the loan enters into repayment, you can’t borrow any more money using that account. Instead, you’ll make payments (of both principal and interest) based on the term outlined in the agreement.

Which Is the Best Option for You?

The option that’s best for you depends on your goals and priorities. If you aren’t planning to stay in the house, selling could make transitioning to a smaller home or rental easy. Plus, you get to benefit fully from your equity.

If you want to remain in your home, HELOCs and refinancing options are both viable. Just be aware that they do come with monthly repayments — something that doesn’t happen with a reverse mortgage. Still, they’re worth considering if a reverse mortgage isn’t a good fit.