Long-time followers of money expert Clark Howard know that he is not a fan of reverse mortgages.
What is a reverse mortgage and why doesn’t Clark like them?
In short, a reverse mortgage allows someone who is “house rich and cash poor” to get a payment from their lender in exchange for the bank getting equity in the house over time. You can either take the payment in a lump sum or get a check each month from the bank.
Reverse mortgages remain a popular lure for cash-strapped seniors, but what’s good in theory is often terrible in execution.
Taking a lump sum cash-out option puts you right in the crosshairs of sleazy insurance salespeople who will push a series of annuities on unsuspecting seniors. “This is just an absolute, horrific abuse of trust and of that senior citizen,” says Clark.
Consumer Reports agrees: “Reverse mortgage should only be a last resort for seniors who want to stay in their homes and have no other alternatives.”
Fortunately, there are alternatives out there to consider for people who are thinking about a reverse mortgage.
4 options to consider before you do a reverse mortgage
Sell your home and downsize
It can be difficult to leave a home you’ve lived in and built memories in for many years, but you may find yourself in a position where you don’t need as much room as you once did. If that’s the case, consider selling your home and moving into a smaller space. This will allow you to access the equity you’ve built in your home to cover expenses you would otherwise be paying with funds from a reverse mortgage.
Refinance your house
With mortgage rates still relatively low, it’s possible that you could refinance your home and end up with lower monthly payments. You can check current rates on sites like Bankrate.com and Lendingtree.com to see how they compare to the rate you’re paying.
After you run the numbers, you may find that you’re able to keep enough cash in your pocket each month to avoid having to go the reverse mortgage route.
Apply for a Home Equity Line of Credit (HELOC) or home equity loan
Similarly, a Home Equity Line of Credit (HELOC) or home equity loan can let you access the equity you have in your house.
Generally, Clark only recommends HELOCs and home equity loans if you plan to use the money to make improvements on your property. If you choose to go this route, you need to understand that you will be putting yourself in the position of making additional monthly payments to pay back the loan, and that you will run the risk of foreclosure if you are unable to to that — so you’ll need to have a plan in place.
Sell to family members
Another option for some people is to sell your home to people you know, instead of giving up a portion of it to the bank. There are a couple of ways of going about this.
One is to sell your home to family members (or even friends) and then lease it back from them. If you sell to children or other relatives, the advantage is that the house stays in the family and whoever buys the house from you is able to take advantage of the tax breaks available to landlords.
Another option is to do an inter-family mortgage loan, which is similar to a reverse mortgage except that the money comes from family members instead of the bank. Your children (or other family members) would essentially make mortgage payments to you, in turn receiving equity in the home. This is quite an attractive alternative to giving that equity back to a bank.
There are tax and estate planning implications to this, so check out a company like National Family Mortgage, which can facilitate this process for a fee.
It’s not fun to be in financial straits as an older adult, but as you can see, if you have equity in your home there are alternatives to reverse mortgages. Please consider them before you make a decision that you and your family might regret down the road.