Before we take a look at what is available as a alternative to a reverse mortgage, I just want to say for the record that I believe a reverse mortgage is a great product, especially in today’s age where many seniors find themselves house rich but cash poor.
But do I feel that it is the best solution for everyone? Probably not.
Are there any alternatives? Of course.
Are the alternatives any good? Let’s take a closer look….
Because I’ve been getting a lot of questions as to the alternatives to a reverse mortgage I wanted to write out a little article on the available options.
1. A Home Equity Line Of Credit (HELOC)
I’m going to start with this alternative because by far it is the most common alternative to a reverse mortgage.
The most important thing to know about a home equity line of credit is that the loan amount is revolving which means you can use it at any time.
Let’s say for example your lender gives you a HELOC for $100,000.
At any time you are welcome to use any of that $100,000 as you wish. If you take out $1,000 you will pay interest on that $1,000. If you use none of it and save it for a rainy day or for emergencies you will pay nothing.
Another thing to keep in mind is that a HELOC is also re-advanceable. Looking at the same example above if you were to use $1,000 of the available $100,000 and decide to pay back $1,000 the following month you would have $100,000 to use again in the future. This flexibility is an obvious benefit to this product coma you can take out as little as you like payback as much as you want and use it again and again in the future.
You can pay back 100% of the money that you borrowed at any time to minimize the amount of interest you will pay.
A closer comparison between a HELOC and a reverse mortgage
- A HELOC is more flexible as Illustrated above, a HELOC is revolving and re-advanceable. Use as much as you like whenever you like and pay off the entire amount with no pennant penalty at any time. Penalties apply for reverse mortgages within the first 5 years of the loan.
- Another nice thing about a HELOC is that rates are generally a little bit lower than reverse mortgages, so you have the ability to save some interest.
- On the other hand a HELOC requires monthly payments when you do decide to use it. a reverse mortgage never requires a monthly payment.
- A full application is required to qualify for a HELOC, your income and credit score will be assessed to determine the ability to make payments. A reverse mortgage does not require prove that you are able to make payments.
- A foreclosure is a potential with a HELOC if you do not keep up with your monthly payments. A reverse mortgage does not have the same risk because payments are never required.
Who should consider a HELOC as an alternative to a reverse mortgage?
This alternative is best for people who can afford payments and who are looking for a rainy day fund or for people who want to finance a large purchase and rather not put it on their credit card.
If you have strong regular income and or not struggling to make ends meet a HELOC is right for you, For those who cannot afford regular payments a reverse mortgage would be the better solution.
2. Selling your home
The second common alternative to a reverse mortgage is selling your home to downsize.
This alternative is a little bit outside of my scope and is difficult for us to advise on. However I have listed a few things to take into consideration below:
- Where are you going to live? Do you like your current neighborhood? is there anything available for you and your current neighborhood?
- Are you still physically able to maintain your home or have the resources to hire someone to do it for you?
- Would moving out of your home make your life better?
- Are you emotionally attached to your home and neighborhood?
A closer comparison between a selling your home and a reverse mortgage
It is difficult to make the comparison between selling her home and a reverse mortgage because it is unfortunately not comparison of apples to apples.
However, from a financial perspective allow me to highlight a few things:
- There are many costs associated with selling your home; right off the top the going rate for selling your home is around 5%, along with legal fees, moving fees, and potentially the headache of storage and disposal of excess belongings.
- Selling your home gives you access to all the equity in your home Where is a reverse mortgage would be spending it down.
- Selling your home however cut you out of future appreciation of your home. Most commonly the gains from house appreciation typically are more than the reverse mortgage costs. You would be potentially giving up a profitable investment depending on the real estate market conditions in your area
Who should consider a selling as an alternative to a reverse mortgage?
Selling her home as an alternative to a reverse mortgage is best for people who are not physically able to maintain their home or have the interest of hiring someone to do it for them. Furthermore this option is also good for people who are not emotionally attached to their home or neighborhood and who have alternative properties to live at.
3. A regular mortgage or refinance
A traditional or regular mortgage is probably the least considered alternative to a reverse mortgage. A mortgage refinance would also be classified here as well, where you would take some equity out of your home to increase your current mortgage.
This is an uncommon alternative because most clients are looking to get rid of their mortgage not increase their current one or get a new one. Furthermore because of Canadian anti-money-laundering legislation equity takeouts are currently limited to $200,000 (Although some exceptions do exist)
However, for people who have their home paid off this is another way to get equity out of your home.
A closer comparison between a regular mortgage and a reverse mortgage
Although many of the points are similar to a HELOC The major difference is that a mortgage is less flexible than a HELOC.
- If you are able to qualify with good income and a good credit score a regular mortgage is going to be the lowest interest rate out of the alternatives above.
- There are restrictions to a regular mortgage such as payment penalties for early payment and limited prepayments without penalty.
- Monthly payments are required and you need to qualify just like a HELOC.
- A mortgage refinance is capped at 80% of the property value and up to $200,000 cash in hand – although some exceptions do apply.
- You risk foreclosure if you do not keep up with regular payments. A reverse mortgage does not require any payments therefore you do not risk for closure.
Who should consider a conventional mortgage as an alternative to a reverse mortgage?
The thing with a conventional mortgage is that the people who can qualify for it probably don’t need it. If you have steady income good credit and a low to no balance on your mortgage then this would be the appropriate alternative for you.
a conventional mortgage is for someone who can simply go and get a mortgage refinance and take some money out of their home or even increase their amortization. To reduce the amount payable every month. Of course this would require regular payments Andy ability to make those payments.
In summary – Alternatives to a Reverse Mortgage
In this article we touched on the three most common alternatives that people look at when thinking about getting a reverse mortgage. For more information on reverse mortgages please download our free guide.
Furthermore it is also worth your time to consider the difference in cost between these products, something that we talked about in more detail in our article reverse mortgage costs and fees.
Did we miss anything? Is there another alternative to a reverse mortgage that should be placed in this post? Please leave a comment and will give you a response.