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6 reverse mortgage alternatives (2021)

Carefully consider these options when thinking about a reverse mortgage

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by Danni White ConsumerAffairs Research Team
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A reverse mortgage allows you to borrow against your home’s equity without making loan payments until you die, move away or sell the home. While this option can open up room in your budget, it may not be the right option for everyone. Read on to explore reverse mortgage alternatives and see what kind of homeowner benefits the most from each option.

Refinancing

Refinancing your home is one of the better alternatives to a reverse mortgage. By refinancing, you can potentially lower your interest rate, lower your monthly payment or withdraw cash against your home's equity. It can be difficult to qualify for refinancing if you’re on a fixed income, but you can increase your odds of approval by working with your current lender or another bank you already have a relationship with. Make sure your credit history is accurate and that you've gathered proof of all your income sources, including Social Security, pensions, military benefits and any other regular sources of income.

Also, your home will need to be appraised before refinancing. You can maximize your home's appraisal value by sprucing up its interior and exterior and providing the appraiser with a list of permanent upgrades you've made to the property. This is a particularly important step if you want to borrow against the value of the home.

Pros

  • Can lower your monthly payment
  • Can lower your interest rate
  • Lets you cash out home equity

Cons

  • Restarts your repayment term
  • Higher long-term costs
  • Reduces home equity
  • Closing costs and fees

Home equity loan

A home equity loan is a second mortgage on your property borrowed against the equity you've grown in your home. This is a great option if you need an immediate influx of cash and can easily manage higher payments over a longer period of time. Like your original mortgage, a home equity loan is secured by your property, meaning your home can be foreclosed on if you can't repay the loan.

You can potentially borrow up to 85% of your home’s value, so you'll still have at least 15% equity in your home after borrowing against it. However, it may be harder to qualify for a home equity loan because lenders typically have more stringent requirements for these loans.

Pros

  • Access to cash
  • Fixed interest rate
  • Tax deductible for home improvements

Cons

  • Reduces home equity
  • Raises monthly payments
  • Secured by your home
  • Closing costs and fees

Home equity line of credit

Similar to a home equity loan, a home equity line of credit (HELOC) lets you borrow against the value of your home. However, instead of providing a lump-sum payment, a home equity line of credit is a revolving credit line like a credit card. You can use a HELOC for whatever you want as long as you repay the balance with interest. You're then free to reuse the available credit.

Pros

  • Reusable
  • Pay only what you owe

Cons

  • Variable interest rate
  • Secured by your home

Sell and downsize

In some cases, keeping your home may not be the best financial decision. Selling and downsizing to a more affordable mortgage is a way to alleviate this financial burden. In some cases, the equity you have in your home may be enough to buy a more affordable home outright.

Some homeowners see selling as an opportunity for adventure and a change of scenery, while others may be reluctant to leave the place they've called home for many years. Consider your needs, the value of your home and how much you owe on your mortgage to determine if this approach is right for you.

Pros

  • Cash from the sale
  • Lets you adjust your housing to your needs
  • Potential change of scenery

Cons

  • Lifestyle adjustments
  • Sentimental attachment to home
  • Your home may need updates before selling

Renting out your house

If you live in an area where rental properties are in demand, renting out your home can be a great way to provide extra income and reduce your financial burdens. This is a good option if you can't or won't sell your home but want some of the benefits of downsizing.

Check rental rates in your area for comparably sized homes to see if this makes financial sense for you. Keep in mind that you'll be responsible for maintenance issues and disputes with tenants. If you don't have the time or energy to deal with these issues, you can hire a property manager to handle them for you.

Pros

  • Extra income
  • Maintain ownership of home
  • Potential change of scenery

Cons

  • You have to relocate
  • Stress of having tenants
  • Maintenance costs

Bankruptcy

A bankruptcy can stay on your credit for up to 10 years.

If you’re considering a reverse mortgage to get out of financial trouble, bankruptcy is also an option. A bankruptcy can stay on your credit for up to 10 years, but the effects on your credit score may not affect you much if you don't intend to take out loans in the future. Likewise, if you're relying on Social Security, veterans benefits or other retirement income, your financial life may be largely unaffected by filing for bankruptcy. Bear in mind that some debts cannot be wiped away by filing for bankruptcy, including most student loans, child support, alimony and other secured debts.

Bankruptcy should always be a last resort, though, even for older adults. If you own your home, your property and other assets may be sold to pay off any outstanding debts. However, most states have a homestead exemption that allows you to keep your home as long as your equity doesn't exceed your state's limits.

Pros

  • Eliminates debts
  • Older adults may have reduced consequences
  • Can keep home in most cases

Cons

  • Hurts your credit score
  • Assets may be sold to pay debts
  • Not all debts qualify

Which reverse mortgage alternative is right for me?

If you're considering a reverse mortgage, carefully think about your current financial situation, your future needs and the details of your home to see whether one of the above alternatives is worth pursuing.

  • If you need long-term budget relief, refinancing, renting or selling your home may be better options.
  • If you need a quick influx of cash but can manage higher monthly payments, home equity loans or lines of credit are worth checking out.
  • Only consider bankruptcy as an alternative if you have a high debt-to-income ratio and aren’t confident in your other options.

A reverse mortgage may end up being the right choice for you. What’s important is that you make an educated decision and know all your options before you commit.

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Profile picture of Danni White
by Danni White ConsumerAffairs Research Team

As a member of the ConsumerAffairs research team, Danni White is committed to providing valuable resources designed to help consumers make informed purchase decisions. Danni specializes in content strategy and development, with over a decade of professional writing and research experience.