Alternatives to a Reverse Mortgage
Article by R. Joseph Ritter, Jr. CFP® EA
If you have not yet signed up for a reverse mortgage but are not sure if you have other choices, consider these alternatives:
- Selling your home – the equity you receive in cash can be utilized in other ways, and a professional financial planner can guide you in how best to meet your goals through this option
- Rent your home – if the rental value of your home is high enough, you could rent your home and receive an income stream to pay the costs of a substitute (downsized) residence, life care facility or other residential arrangement. This would keep a significant asset (your home) in your estate for future needs or as an inheritance to your family
- Utilize cash value in your life insurance or annuity. As life insurance builds cash value, it creates a potential source of liquid assets during your lifetime. Taking a loan against life insurance means that the death benefit will be reduced by the outstanding loan balance at your death, however, if you need to have access to these funds for your support, it is a less expensive alternative to a reverse mortgage. Surrendering a cash value life insurance policy or annuity is also an option if there are no surrender charges.
- Consider a Rex Agreement. Named for the company that first created the idea, a Rex Agreement pays you a portion of the equity in your home in exchange for a share of the change in future value of your home. The Rex Agreement typically terminates when the home is sold. If the home is sold for a gain, the investment company is paid by collecting a share of the proceeds plus recovering its initial investment. However, if the home decreases in value, the investment company receives only a portion of its initial investment. Like a stock option, your gain is less than it would be if you had never initiated the Rex Agreement, but your loss is also reduced. As an example, a homeowner may obtain $100,000 in a Rex Agreement for a home valued at $750,000 in exchange for the investment company acquiring a 50% share of the change in the home’s value. If the home later sold for $850,000, the homeowner would receive $50,000 (half of the appreciation), and the investment company would receive $150,000 – its initial investment plus 50% of the appreciation. However, if the home sold for $650,000, the investment company’s share would only be $50,000. You keep the $100,000 initially paid to you under the Rex Agreement, meaning that the amount of money you actually lost is $50,000, whereas without the Rex Agreement your loss would have been $100,000. The Rex Agreement is not debt, so there is no interest due, and the initial fees are no greater than typical home closing costs.
- An adult child can lend you money similar to the reverse mortgage arrangement without incurring the fees associated with the reverse mortgage, except that a certain amount of interest must still be charged and paid to avoid income/gift tax problems. You could also arrange for an installment sale of your home to an adult child which would provide you with an income stream and eventually transfer all ownership to the child. The advice of a competent attorney should be obtained to properly structure such a transaction.
- Sell a major asset or business interest that would otherwise be illiquid.
- Stay in your home and supplement your needs through state and local assistance programs. Basic assistance may be available locally without having to depend on the federal government. Contact your local Agency on Aging to find programs for energy assistance, performing household chores, transportation and access to health care and prescription drugs
- The Salvation Army operates sharing programs to help pay for utilities. Contact your local Salvation Army for details. Your local utility should also be contacted to discuss programs that may be available to help. Alternative utilities may also be available. In Florida, for example, a credit of $13.50 may be available for telephone service to senior citizens
- Property tax deferral programs may be available through your state. Colorado, for example, operates a property tax deferral similar to a reverse mortgage that pays the county tax collector and then seeks to recover the property tax payments at such time as the resident no longer needs assistance or the residence is sold. The program is available to senior citizens and active military personnel
- Many states also offer inexpensive health care and prescription drug programs or discount cards
- Identify the largest source of strain on your finances and then look for ways to reduce the outflow of money in this area. If it is health care related, you can speak with your provider about a payment plan or other ways to address health care costs
- Other assistance programs may also be available depending on your situation, need and resources available
- The National Council on Aging, with help from a grant from the FINRA Investor Education Foundation, launched a website at http://www.homeequityadvisor.org/ which provides a resource for senior citizens to narrow down the best options that may be available before making a decision on a reverse mortgage.
The state and federal governments are increasingly having to deal with the financial difficulties caused by defaults on reverse mortgages and senior citizens being unable to remain in their homes. States want senior citizens to remain in their homes for as long as possible, and it is far less expensive for states to operate assistance programs such as those outlined above than to underwrite the burden of reverse mortgages.
As long as you understand the true cost of the reverse mortgage and are still willing to accept the price, the reverse mortgage may work in your situation. However, you should still exhaust all other alternatives that do not cost you anything or which carry a very limited cost before exploring the reverse mortgage. This is the value that a fee only professional financial planner can bring to your situation because the guidance you will receive is unbiased and unaffected by any commissions he or she is receiving as a result of the recommendations given to you.