Alternatives to a Reverse Mortgage

Reverse mortgages can be problematic if not done correctly and require careful attention to the rights of the surviving spouse, if you are married. Of course, the end of the process means you or your heirs give up your home unless you are able to buy it back from the bank. Unscrupulous lenders can also be a huge risk so choose this option carefully (see 5 Reverse Mortgage Scams).There are other ways to tap into your home’s equity that are worth considering, as well. Here we take a quick look at five alternatives to reverse mortgages.

1. Refinance Your Existing Mortgage
If you have an existing home loan, you may be able to refinance your mortgage to lower your monthly payments and free up some cash. One of the best reasons to refinance is to lower the interest rate on your mortgage, which can save you money over the life of the loan, decrease the size of your monthly payments and help you build equity in your home faster. Another perk: If you refinance instead of getting a reverse mortgage, your home remains an asset for you and your heirs.
2. Take Out a Home-Equity Loan
Essentially a second mortgage, a home-equity loan lets you borrow money by leveraging the equity you have in your home. It works the same way your primary mortgage does: You receive the loan as a single lump-sum payment, and you cannot draw any additional funds from the house.For tax years up to and including 2017, interest on a home-equity loan for amounts up to $100,000 is generally deductible regardless of how you used the loan, be it for credit card debt or student loans. And if you use the loan for what are called qualified purposes – which are to “buy, build or substantially improve the residence that secures the loan” – you could take tax deductions on up to $1 million (including any first-mortgage debt you have). 

However, the new Tax Cuts and Jobs Act narrowed the eligibility for a home-equity loan deduction. For tax years 2018 through 2025, you will not be able to deduct home-equity loan interest unless the loan is used specifically for the qualified purposes described above. It also dropped the level at which interest is deductible to loans of $750,000 or less.

These are generally fixed-rate loans, which provide security against rising interest rates. Because of that, the interest rate is typically higher than for a home equity line of credit. As with refinancing, your home remains an asset for you and your heirs. Because your home acts as collateral, it’s important to understand that it is at risk of foreclosure if you default on the loan. For more on this topic, see Reverse Mortgage or Home-Equity Loan?

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