Source: Yahoo! Life —
A reverse mortgage can provide you with a steady stream of income in retirement. Reverse mortgages do have risks and they can affect your ability to pass on assets to your heirs later. Fortunately, there’s more than one alternative to reverse mortgage funding you might pursue if you’re hoping to supplement other sources of retirement income.
If you’re looking for more personal advice, consider working with a financial advisor.
What Is a Reverse Mortgage and How Does It Work?
A reverse mortgage allows eligible homeowners to turn their equity into income. Reverse mortgage products that are backed by the federal government are called Home Equity Conversion Mortgages (HECMs).
When you take out a reverse mortgage, you’re not getting a loan in the traditional sense. The reverse mortgage lender gives you money, either in a lump sum or installment payments, that you can use to fund day-to-day living expenses or other costs in retirement. Meanwhile, you pay nothing back while you live in the home.
Once you pass away or otherwise no longer live in the home, the reverse mortgage becomes payable with interest. There may be an exception if your spouse continues to live in the home even if you’ve passed away or moved to a nursing home permanently.
A reverse mortgage can be an attractive option for creating retirement income, though they do have some downsides. For one thing, taking out a reverse mortgage could put your heirs in the position of having to sell your home when you pass away to repay what’s owed. For another, there are a number of reverse mortgage scams that target unsuspecting or vulnerable seniors in an attempt to take their money or the home itself.
Reverse Mortgage Alternatives
Not every homeowner qualifies for a reverse mortgage and some homeowners may decide it isn’t right for them after reviewing the pros and cons. There are, however, several options you might explore as an alternative to reverse mortgage funding if you need cash in retirement.
1. Cash-Out Refinancing
Cash-out refinancing allows you to replace your existing mortgage with a new home loan while withdrawing the equity you’ve accumulated in cash at closing. A cash-out refi could provide you with ready access to funds that you could use to pay living expenses, make home repairs or cover medical costs. The main drawbacks include a potentially higher mortgage payment and the risk of losing the home should you default on loan payments.
2. Home Equity Line of Credit
A home equity line of credit (HELOC) is a flexible line of credit that’s secured by your home equity. You can use a HELOC to pay for home improvements, consolidate high-interest debt or pay other expenses. A typical HELOC may have a 10-year draw period in which you can spend from your credit line, followed by a 20-year repayment term. HELOCs can offer flexibility, though they can become expensive if you have a variable interest rate that increases over time.
