• Reverse Mortgages

Alternatives To A Reverse Mortgage

Under the right circumstances, reverse mortgage can be one of the best financing solutions for people aged 55 or over. It lets you borrow money based on your home’s value and use it to your liking, tax-free, and interest-free.  

Understanding the ins and outs can be tricky – which is why I created my free reverse mortgage guide.

However, when the circumstances aren’t right, there are other alternatives out there that might make it better for a person to choose a different financing path, instead of a reverse mortgage.

The most common options we see are a Home Equity Line Of Credit (HELOC), selling your home or getting a mortgage, or refinancing the existing one.

We will discuss these more in today’s article.  

1.A Home Equity Line Of Credit (HELOC) 

A HELOC is the most common alternative people choose over a reverse mortgage. It’s like a revolving credit for which you, the lender, can decide the amount of available credit. To help you understand it better, here’s an example. Let’s say you take out a HELOC of $70,000. You don’t have to use this full amount at once. You don’t even have to use it at all. The choice is yours. You will only pay interest for the amount you’ve used.  

Advantages of a HELOC over getting a reverse mortgage  

  • HELOC allows you to borrow up to 65% of your home’s value, while in the case of a reverse mortgage, this percentage is 55%.  
  • There are no age requirements for a HELOC, but a reverse mortgage can be taken out only if the property owner is older than 55.  
  • The interest you pay for a HELOC is only as high as the loan amount you use. If you use $0, you pay $0 in interest. 

Disadvantages of a HELOC over getting a reverse mortgage  

  • To be eligible for a HELOC, you need to provide proof of income and credit history, which is not required for a reverse mortgage. You only need to provide proof of ownership over the property with a reverse mortgage.  
  • A HELOC requires monthly interest payments, while a reverse mortgage does not.  
  • One of the significant disadvantages of using a HELOC instead of a reverse mortgage is the risk of losing your home. If you don’t keep up the regular payments, you can lose your home, which is not the case with a reverse mortgage. As there are no monthly payments with a reverse mortgage, you can’t lose your home by using it. 

Who Is It Best For? 

A HELOC is a good alternative for those that don’t have a savings fund on the side but want to have that financial safety net. It’s also good to meet short-term financial needs as it allows you to have flexibility over the funds you’re using and the interest you’re paying with it.  

However, if your regular income is enough to cover all your expenses, and you need financing for long-term purposes, a reverse mortgage may be a better option for you.  

It’s also important to compare the costs and fees of a reverse mortgage vs a Home Equity Line of Credit.

2. Selling Your Home  

Selling your property and downsizing can be a better option at times as it allows you to turn your home equity into cash pretty fast and gives you some financial freedom. It can be a difficult choice to make, but it’s always good to have a perspective of what it means, and if it’s a choice you should make.  

Advantages of selling your home over getting a reverse mortgage 

  • You get the full equity from your home while getting a reverse mortgage will provide you with only around half of your property’s value. 
  • There are no age requirements to be able to sell your home, so you can do it whenever you choose to. A reverse mortgage, on the other hand, can be taken out only if the property owner is older than 55.  
  • You can downsize and buy a smaller home with the money you receive and use the remaining funds as you prefer.  

Disadvantages of selling your home over getting a reverse mortgage 

  • You are no longer the owner of your home. This means that you cannot earn from the future appreciation of the home value, which is not the case with a reverse mortgage. With it, you can keep living and owning your house. Any increase in its value will be a profit for you. 
  • Because you don’t own a property, your credit score will go down, and you’re leaving no inheritance for your children and/or family members.  
  • Selling your home often comes with commission rates around 5%, which practically means you’re giving away 5% of your home’s value. With a reverse mortgage, though, you can offset the costs and fees with the future price appreciation. 

Who is it best for?  

The most common reason why people opt to sell their home instead of getting a reverse mortgage is that they want to downsize. Taking care of a big home requires quite the effort, so many people decide to downsize to a condo or a smaller house that requires less maintenance.  

Selling your home is a viable alternative if you need to have liquid funds available at all times, but aren’t eligible for a reverse mortgage, regular mortgage, a loan, or a HELOC.  

3. A Regular Mortgage or Refinancing Your Mortgage  

If you already have a loan, you can try to refinance your mortgage to lower your monthly payments. A mortgage (and refinancing) is one of the least preferred financing options out there, but there are still some facts that make its case. 

Advantages of choosing a mortgage (or mortgage refinancing) over a reverse mortgage 

  • If you have a good credit history and a steady income to provide, you can receive a mortgage with a lower interest rate than a reverse mortgage and other financing options. 
  • A mortgage doesn’t provide the full value of the property, but it’s slightly higher than a reverse mortgage. It gives you a loan for around 80% of the property’s value, while a reverse mortgage provides you with 55% of the property value. 
  • Same as other financing types, a mortgage doesn’t have an age eligibility requirement. It can be taken out by a person of any age as long as they prove to be creditworthy.  

Disadvantages of choosing a mortgage (or mortgage refinancing) over a reverse mortgage 

  • It provides almost zero flexibility. You can only use the money you receive for a property, which is not the case with a reverse mortgage. A reverse mortgage allows you to use the money you receive towards anything you want.  
  • Same as with a HELOC, you are also under risk of losing your home if you don’t keep up with regular payments on your mortgage. You can never lose your home with a reverse mortgage. 
  • To be eligible for a mortgage, you need to provide proof of income and credit history, which is not required for a reverse mortgage. You only need to provide proof of ownership over the property when getting a reverse mortgage.  

Who is it best for? 

Typically, our clients consider reverse mortgages, HELOCs, and selling their homes to get rid of the mortgage, not the other way around. However, there are some situations when this can be a good alternative. It’s a good option for those who don’t already have a mortgage and need some finances. 

People with stable income flow and good credit history can also choose a standard mortgage instead of a reverse mortgage.  

Summary  

There are always different alternatives when it comes to financing, and each of them is fit for a different person and different properties. It’s good to be aware of the pros and cons of each financing option before making that final decision, so I hope we helped you make the right call.  

Make sure and also consider the rates and penalties of any mortgage option.

If we missed anything, or you have a question, leave a comment below or contact us directly, we will make sure to tend to you as soon as we can.   

Free Reverse Mortgage Evaluation

I hope you enjoyed this article. If you’d like a free reverse mortgage evaluation, I’d be happy to help you.

With over 20 years experience in mortgages, I can look at your situation and advise you if this is a good fit – or if one of the thousands of other mortgage products I have through the 15+ lenders I work with might be better.

Simply fill out the short application form at:
https://www.goodadviceforabetterlife.ca/application-reverse/


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