Before I examine the alternatives to a reverse mortgage, I should reveal that I think is a fantastic product, especially in today’s age where many people find themselves to be ‘house rich’ but ‘cash poor’.
But do I think it the best solution for absolutely everyone? Of course not.
Are there alternatives out there? Yes.
Are the alternatives any good? Let’s take a look…
So today I thought I’d examine some of the alternatives that you should consider while making your decision.
But First A Quick Recap – What Exactly Is A Reverse Mortgage?
Before examining the alternatives, it is important to understand what a reverse mortgage is first – for this we suggest downloading our free CHIP reverse mortgage guidebook.
With that out the way, let’s continue with the rest of the article.
1. A Home Equity Line Of Credit (HELOC)
I would start with this as it is without a doubt the alternative option that we hear from the most.
A home equity line of credit is essentially a ‘revolving’ loan which you can dip into at any time.
For example, let’s say the lender gives you a HELOC of $50,000.
You can take as much or as little of the $50,000 as you like. If you take out $0, you pay $0 in interest. But any amounts you do take out are subject to interest.
The most obvious benefit of this product is flexibility – you can take out as little as you like and pay back as much as you want, when you want.
You can pay back 100% of what you took out and minimize the amount of interest you will pay.
We have already actually written a detailed article about how you can combine the best of both products into a Line Of Credit.
In addition to this, I will take a look at the differences between this and a Home Equity Line Of Credit:
- – A HELOC is more flexible – as I mentioned above you can put money in and take it out at will. You can pay off the entire loan with no penalty whenever you like – unlike a reverse mortgage, where penalties apply in the first 5 years of the loan.
- – Another advantage is that rates for a HELOC are generally at slightly lower rates. So you save a little on the interest rate.
- – However, a HELOC requires monthly interest payments of the minimum amount. No payments are required for a reverse mortgage.
- – In addition to this, a HELOC is still a conventional loan that you need to qualify for (your income and credit score will be assessed as part of this). This is not the case with a reverse mortgage.
- – Finally, a HELOC could ultimately lead to you losing your home if you don’t keep up with payments. This is also not the case with a reverse mortgage, as no payments are required so you can never lose your home. Ever.
Who Is This A Good Alternative For?
This is the best alternative for those who are just needing short-term cash or to have access to a ‘rainy day fund’.
The reason is because of it’s flexibility – since you only need it for a short-term or emergency basis, you can dip in and out of it when you like.
If you have enough regular income and are not struggling, this might suit you; for those who need the cash for longer-term purposes, a reverse mortgage might be a better solution.
2. Sell Your Home
Easily the 2nd most common alternative is selling your home.
Like a HELOC, we often have clients who are considering this as another option.
This one doesn’t need much explanation and is hard for us to advise you on. However, there are some considerations that you need to make:
- – Where are you going to live and what will the cost of this be?
- – How does this cost compare to a reverse mortgage, HELOC or other alternatives (see below)?
- – Are you physically able to stay in your home and maintain it? This is a very common reason for seniors looking to move.
- – Would moving out of your home make your life better or worse?
- – How valuable is your home to you emotionally – not financially?
Since selling your home isn’t really a financial product, you can’t really make an apples to apples comparison.
However, from a financial perspective, let me raise a few things to consider:
- – Selling your home would see you ‘withdraw’ all the equity you currently have – where as a reverse mortgage could eat into that (in 99% of cases it does not).
- – However, you also lose out on future appreciation of your home – it is itself an investment and you are selling that investment and giving up any future returns (house price gains). Often these house price gains are more than the reverse mortgage costs – so you are giving up a profitable investment asset.
- – In addition to this, selling your home is not free and the going commission rate in most of Canada just now is around 5%. So you are giving away 5% of the value of your home off the bat – with no house price growth or anything to offset this loss.
Who Is This A Good Alternative For?
Sometimes people get to a stage where they aren’t physically able to maintain their home – so either downsizing into a condo or renting a condo can be a good idea.
In addition to this, there are a few people who aren’t emotionally attached to their home – or maybe even own 2nd homes (which are not eligible for a reverse mortgage). This would be a good alternative for them.
3. A Regular Mortgage (Or Mortgage Refinance)
The final – but least considered alternative – is a ‘regular’ or traditional mortgage.
Included in this would be a mortgage refinance – where you increase the amount of the mortgage and take out some more equity.
The reason why so few of our clients consider this is that some of them already hold a regular mortgage on their home and they are looking to get rid of it – not consider it as an alternative!
Others spent years paying off the mortgage and the thought of putting it back on there and having to make those monthly payments again sends shivers down their spine.
However, for those who do not have a mortgage already, it is another way to get equity out of your home.
Many of the points above – regarding a HELOC – apply for a conventional mortgage.
However, it is not quite as flexible as a HELOC. There are a few other considerations for this too:
- – With regards to rate, assuming you have reasonable income and a good credit score, this is going to be the lowest interest rate out of any of the alternatives – lower than both a HELOC and reverse mortgage.
- – The other features of the mortgage are going to be very similar – penalties for early payment and restrictions about how much of the balance you can pay off though.
- – However, this is probably the least flexible of the 3 options. In addition to this, you will be required to make monthly payments and you also need to qualify for it (like a HELOC).
- – A mortgage refinance is also capped to 80% of the property value by law.
- – Finally, you could lose your home for not keeping up with payments – unlike a reverse mortgage where you are secured from losing your home by the legal contract.
Who Is This A Good Alternative For?
The catch with a conventional mortgage is that the people who it is a good alternative for don’t really need it!
That is, if you have steady income, a good credit rating and a low mortgage balance (or zero mortgage balance) then this is a good alternative for you – except that you probably don’t actually need the cash.
The most likely candidate for this is someone who can simply go through a mortgage refinance and take more money out of their home, increasing their mortgage balance in the process.
Of course, this means higher monthly mortgage payments and paying more interest on your mortgage anyway – but for some people this is not a problem and a good alternative.
What About The Pros and Cons?
We have already covered the pros and cons of a reverse mortgage in detail – click here to read our article on this.
In Summary – Reverse Mortgage Alternatives
In this article we summarized the 3 most common alternatives that people consider.
Did we miss anything? If that’s the case, and there is an alternative to a reverse mortgage that you are considering, leave a comment below and we’ll give you a response.