A reverse mortgage can provide you with a steady stream of income in retirement. Reverse mortgages do have risks and they can affect your ability to pass on assets to your heirs later. Fortunately, there’s more than one alternative to reverse mortgage funding you might pursue if you’re hoping to supplement other sources of retirement income.
If you’re looking for more personal advice, consider working with a financial advisor.
What Is a Reverse Mortgage and How Does It Work?
A reverse mortgage allows eligible homeowners to turn their equity into income. Reverse mortgage products that are backed by the federal government are called Home Equity Conversion Mortgages (HECMs).
When you take out a reverse mortgage, you’re not getting a loan in the traditional sense. The reverse mortgage lender gives you money, either in a lump sum or installment payments, that you can use to fund day-to-day living expenses or other costs in retirement. Meanwhile, you pay nothing back while you live in the home.
Once you pass away or otherwise no longer live in the home, the reverse mortgage becomes payable with interest. There may be an exception if your spouse continues to live in the home even if you’ve passed away or moved to a nursing home permanently.
A reverse mortgage can be an attractive option for creating retirement income, though they do have some downsides. For one thing, taking out a reverse mortgage could put your heirs in the position of having to sell your home when you pass away to repay what’s owed. For another, there are a number of reverse mortgage scams that target unsuspecting or vulnerable seniors in an attempt to take their money or the home itself.
Reverse Mortgage Alternatives
Not every homeowner qualifies for a reverse mortgage and some homeowners may decide it isn’t right for them after reviewing the pros and cons. There are, however, several options you might explore as an alternative to reverse mortgage funding if you need cash in retirement.
1. Cash-Out Refinancing
Cash-out refinancing allows you to replace your existing mortgage with a new home loan while withdrawing the equity you’ve accumulated in cash at closing. A cash-out refi could provide you with ready access to funds that you could use to pay living expenses, make home repairs or cover medical costs. The main drawbacks include a potentially higher mortgage payment and the risk of losing the home should you default on loan payments.
2. Home Equity Line of Credit
A home equity line of credit (HELOC) is a flexible line of credit that’s secured by your home equity. You can use a HELOC to pay for home improvements, consolidate high-interest debt or pay other expenses. A typical HELOC may have a 10-year draw period in which you can spend from your credit line, followed by a 20-year repayment term. HELOCs can offer flexibility, though they can become expensive if you have a variable interest rate that increases over time.
3. Home Equity Loan
A home equity loan is a lump sum amount you can borrow against your home equity. Unlike HELOCs, repayment for home equity loans begins right away. Instead of a variable rate, home equity loans typically have a fixed rate. That can offer predictability with payments since they won’t change over time. Like HELOCs and cash-out refinancing, a home equity loan uses your home as security so defaulting on payments could put you at risk of losing the property to foreclosure.
4. Sell the Home to Your Children
If you’d like to keep your home in the family but you need money for retirement, you could sell it to your children. That allows them to maintain ownership of the home and you can get cash in return that you can use to pay living expenses. Depending on how much you’re able to sell the property for, you may have enough to buy a smaller property in cash which can help reduce everyday expenses in retirement.
5. Sell the Home on the Open Market
In a hot housing market, it can be quite easy to sell a home for significant profits. If you don’t have children or they have no interest in inheriting your home, you might choose to list it for sale to the buyer who makes the highest offer. Just keep in mind that doing so may only make sense if you’re able to find a less expensive home to purchase or rent.
6. Rent it Out
Renting out your home could produce a steady stream of monthly income for retirement, without requiring you to give up the property completely. Depending on the temperature of the rental market in your area, you might be able to command rent prices that are high enough to cover your monthly mortgage payment if you have one, while also giving you some extra cash flow.
7. Sell Other Assets
If you need cash for retirement but you don’t want to put your home on the line, you could eliminate it from the equation and sell off other assets instead. For example, you might sell a plot of land you purchased but never developed or offload your antique coin collection to a specialty dealer. Keep in mind that if you’re selling assets for more than what you initially paid for them, capital gains tax may apply. Talking to your financial advisor can help you develop a plan for selling off assets strategically in order to minimize your tax liability.
8. Purchase an Annuity
An annuity is a contract between yourself and an insurance company. You pay premiums to the insurance company, then receive payments back at a later date. Annuities can be a good source of retirement income since you can receive payments for life once they begin. There are, however, some risks to be aware of since annuities can charge high fees and annuity companies don’t always have the best reputation.
9. Get a Personal Loan
A personal loan is another possibility for getting cash to fund retirement expenses. With a personal loan, you can borrow a lump sum of money which you’re obligated to repay with interest. Many personal loans are unsecured, meaning you don’t need to offer any type of collateral to the lender.
A personal loan may not be an ideal solution, as you’re creating debtbut it’s not tied to your home so there’s less risk in that regard. If you’re interested in getting a personal loan, it’s important to shop around and compare loan rates and terms from different lenders.
Is a Reverse Mortgage Ever a Good Idea?
Reverse mortgages can be a good option for creating retirement income but they’re not ideal for every homeowner. You might consider a reverse mortgage if you:
- Meet the requirements for a reverse mortgage.
- Own your home outright or have paid off most of the mortgage.
- Have sufficient equity to borrow against.
- Need steady income, without an added debt payment.
- Are comfortable with the possibility of your heirs having to sell the home later.
Exploring every alternative to reverse mortgage financing can help you to decide which path to take. You may find that it makes more sense to get a home equity loan instead or rent out the property and move in with your adult children if that’s something they’re willing to discuss. Again, your financial advisor can help you navigate your options when mapping out a retirement income plan.
The Bottom Line
Reverse mortgages can generate retirement income, but they can be expensive if they’re accumulating interest at a high rate. If you’re interested in a reverse mortgage, comparing lenders is a good starting point. And if not, you can take time to shop around for the best home equity loan or HELOC rates, compare personal loan rates or research whether annuities might be a better fit.
Mortgage Planning Tips
- Consider talking to your financial advisor about the best alternative to reverse mortgage financing if you’re looking for ways to increase retirement income. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matchesyou with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you plan to sell your home to create cash flow for retirement, be aware of how much of the proceeds you can exclude from capital gains tax. Current tax rules allow you to exclude up to $500,000 in gains from the sale of a home if you’re married and file a joint return. The limit drops to $250,000 for single filers. Talking to an accountant or other tax professional can help you better understand any potential tax consequences of selling your home.
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Rebecca Lake, CEPF® Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.