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Category: Financial Planning

What needs to happen after a spouse dies?

Better Plan than a Reverse Mortgage?

If you’re 62 or older, one way to get a bit more cash, is to use the equity in your home in a reverse mortgage. It’s a type of loan that allows you to borrow against the equity in your home and receive a set monthly payment or line of credit (or a combination of the two). The repayment is deferred until you move out, sell the home, become delinquent on property taxes or insurance, the home falls into disrepair, or you pass away. At that point, the house is sold and any excess funds after repayment belong to you or your heirs. Is there a better plan than a reverse mortgage?

Investopedia’s recent article entitled “Alternatives to a Reverse Mortgage” explains that reverse mortgages can be troublesome, if you don’t set it up right. They also require careful consideration for the rights of the surviving spouse, if you’re married. Ultimately, with a reverse mortgage, you or your heirs give up your home, unless you’re able to buy it back from the bank. There are some less than stellar reverse mortgage companies out there, so it can be risky.

There are a few other ways to generate cash for your living expenses in retirement.

Refinance Your Mortgage. You may be able to refinance your existing mortgage to lower your monthly payments and free up some cash. It’s wise 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 more quickly. If you refinance rather than going with a reverse mortgage, your home remains as an asset for you and your heirs.

Get a Home-Equity Loan. This loan or second mortgage allows you to borrow money against the equity in your home. Note that the new Tax Cuts and Jobs Act restricted the eligibility for a home-equity loan interest deduction. For tax years 2018 through 2025, you won’t be able to deduct home-equity loan interest, unless the loan is used specifically for qualified purposes. Like refinancing, your home remains an asset for you and your heirs. Remember that because your home is collateral, there’s a risk of foreclosure, if you default on the loan.

Use a Home Equity Line of Credit. A home-equity line of credit (HELOC) lets you borrow up to your approved credit limit on an as-needed basis. Unlike a home-equity loan, where you pay interest on the entire loan amount whether you’re using the money or not, with a HELOC you pay interest only on the amount of money you actually take out. These are adjustable loans, so your monthly payment will change with fluctuating interest rates.

Downsize. The options previously discussed let you keep your existing home. However, if you’re willing and able to move, selling your home allows you to tap into your equity. Many people downsize, because they’re in a home that’s much larger than they need without children around. Your current home also may be too difficult or costly to maintain. When you sell, you can use the proceeds to purchase a smaller, more affordable home or you might just rent, and you’ll have extra money to save, invest or spend as you want.

Sell Your Home to Your Children. Another alternative to a reverse mortgage, is to sell your home to your children. You might think about a sale-leaseback. In this situation, you’d sell the house, then rent it back using the cash from the sale. As landlords, your children get rental income and can take deductions for depreciation, real estate taxes and maintenance. You could also consider a private reverse mortgage. This works like a reverse mortgage, except the interest and fees stay in the family: your children make regular payments to you, and when it’s time to sell the house, they recoup their contributions (and interest).

Reverse mortgages may be a decent option for people who are house rich and cash poor, with lots of home equity but not enough income for retirement. However, this article lays out some other options, that let you to tap into the equity you’ve built up in your home. Before making any decisions, do some research on your options, shop around for the best rates (where applicable) and speak with an experienced elder law attorney. To learn more about how you can protect your home and other assets, please visit our previous posts.

Reference: Investopedia (June 25, 2020) “Alternatives to a Reverse Mortgage”