A reverse mortgage can be an excellent mortgage option for certain people but reverse mortgages are not right for every situation or every borrower. Before you commit to a reverse mortgage, you should explore some of the alternatives to a reverse mortgage that may fit your needs a little better.
As good as a reverse mortgage can be, and it has changed the lives of many Canadian retirees, there may be other options that make more sense for you.
1. Refinance Your Existing Mortgage
This is probably one of the simplest alternatives to a reverse mortgage. If you’re considering a reverse mortgage, it’s probably because you have equity built up in your home but are lacking in income. Refinancing the remaining balance of your mortgage could reduce your monthly expenses and free up some cash flow.
If you can refinance at a lower interest rate, you can save money over the life of the loan and build equity faster by paying off the mortgage earlier.
A bonus to refinancing the traditional way instead of going with a reverse mortgage is that your home remains an asset for you and your heirs.
2. Take Out a Home Equity Line of Credit
For many homeowners, a Home Equity Line of Credit, or HELOC, is another reasonable choice when it comes to alternatives to a reverse mortgage. If you need a large sum of money right now to fund some renovations you want to make to your home and your income can accommodate paying the interest over time, then a HELOC might make more sense.
With a HELOC, you only pay interest on the portion of the line that you’ve actually used. Not the total amount like you would with a reverse mortgage. A HELOC is also completely open, which means you can pay off the balance at any time without any penalty. Another benefit compared to a reverse mortgage.
The danger with a HELOC is that if you miss a payment or fall behind, you can potentially lose your home, just like with a standard mortgage. Just something to keep in mind when it comes to a Home Equity Line of Credit.
3. Sell Your Home (and Maybe Downsize)
A less palatable option may be to just sell your home. If you’re willing and able to move, selling your home allows you to access the equity and value you have been building up.
This can be an appealing option if your home is now larger than you currently need, or is too difficult to maintain. You can sell the house and buy a smaller, more manageable home, or you can rent. Either way you will have additional funds that you can invest or spend as necessary.
Investing in this example is another great option. If income and lifestyle are the reasons you need to access your equity, than taking that equity and investing it at a reasonable rate of return could potentially increase your yearly income considerably.
For example, we have worked with clients that we’ve referred to our lending partner that have generated a return of 8% annually. For some of them, this means an increased cash flow of $20 000 to $30 000 each year.
If you want to find out more about this kind of investment opportunity, click here to schedule a no obligation call with one of our representatives.
4. Sell Your Home to Your Children
Another one of the more interesting and less explored alternatives to a reverse mortgage is to sell your home to your children.
One approach is a sale-leaseback agreement, in which you sell the house, then rent it back using the cash from the sale. As landlords, your children get rental income and will be able to take deductions for depreciation, real estate taxes and maintenance.
Another approach is a private reverse mortgage, which works like a reverse mortgage except the interest and fees stay in the family. Your children make regular payments to you, and when it’s time to sell the house, they recoup their contributions (and interest).
Although it’s not free to set up this type of arrangement, it is typically much cheaper than getting a reverse mortgage through a bank, and the home remains an asset for you and your children. Selling to your children has tax and estate-planning ramifications, so it’s important to work with a qualified tax specialist or attorney.
The Bottom Line
Reverse mortgages may be a good option for people who are house rich and cash poor, with lots of home equity but not enough income for retirement. There are other options, however, that allow you to tap into the equity you have built up in your home and you should explore your options before committing to anything.
Before making any decisions, it’s a good idea to research your options, shop around for the best rates (where applicable) and consult with a qualified tax specialist or attorney.
If you’re ready to compare your options and ask your questions with a mortgage professional, we would love to talk to you. Give us a call at 519-804-2775 or you can get started by filling out our simple 90 second application.