3 Alternatives to a Reverse Mortgage

A reverse mortgage is designed for homeowners 62 or older that allows them to convert part of the equity in their home into cash. On its face, a reverse mortgage may sound like a gift from heaven, especially for someone whose retirement plans aren't working out quite as expected. However, it's not right for everyone.

If you're considering a reverse mortgage, it's a good idea to examine other options before making a final decision. Here are three of those other options.

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1. Sell to pursue other dreams

If you've dreamed of relocating to another state or even retiring to another country, selling the house can provide the cash you need to make that dream come true. And if you're over all the maintenance associated with owning the home, selling opens you up to a new range of options.

2. Borrow the money differently

Taking out a home equity loan or home equity line of credit are two ways to borrow against the equity in your house without paying the high fees associated with a reverse mortgage. Because you're using your home as collateral, the interest rate associated with a home equity loan or HELOC is lower than you'd pay for a personal loan or a reverse mortgage.

Whether you have healthcare expenses hanging over your head or need money to spruce up the property, loan qualifications tend to be more relaxed. That's because the lender knows that if worse comes to worst and you miss payments, the home can be foreclosed on and sold to cover the loss.

Note: Any decision to use your home as collateral is serious. Whether it's through a reverse mortgage or home equity loan, you must understand the details of the agreement and be confident that you can keep up with the terms.

3. Rent out extra space

A great roommate can help alleviate loneliness while also covering some of the costs associated with your home. If you want to remain in your home without taking out a loan of any kind, a roommate may make that possible. Carefully vet anyone who shows interest in renting a room from you by obtaining a copy of their credit report and verifying personal references (if you don't already know them).

Alternatively, if you have extra space available on or around your property, consider renting it out. Americans are famous for having more "stuff" than anyone could possibly need (which helps explain why storage units are in demand). Harness the need for storage by renting out space in your garage, basement, or attic. If you live on land, someone may be happy to rent enough space to park an RV or boat.

Whether your need for extra income is due to everyday expenses, a tax bill due, or repairs needed to the home, the funds don't all have to come from one source. It's OK to mix and match money-making ideas.

Why alternatives matter

The DC Department of Insurance, Securities and Banking (DISB) points out some of the ways a reverse mortgage may negatively impact your financial situation.

• Costs: One-time, up-front costs include origination fees, real estate closing costs, and a mortgage insurance premium.
• Interest and fees: The interest rate and fees you pay for a reverse mortgage are higher than the rate you would pay on other types of loans.
• Ever-rising balance: Because interest and fees are added to the balance of a reverse mortgage each month, the balance increases over time, and your equity in the property decreases.
• Other expenses: You must continue to cover the cost of property taxes, homeowner's insurance, and home maintenance.
• When you die: If leaving your home to heirs is part of your estate plan, a reverse mortgage could put a kink in your good intentions. The mortgage balance is due upon the death of the last surviving borrower. At that time, if your heirs wish to keep the home, they must pay the loan balance in full. Otherwise, they need to sell the property to pay off the balance. If heirs do nothing, the lender may foreclose.

While a reverse mortgage may be the ideal financial tool for some, for others, it's important to know there are alternatives worth exploring.

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