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How to Use Your Home As Retirement Income Without Taking Out a Reverse Mortgage

[Updated: Dec 11, 2020 ] Mar 10, 2020 by Maurie Backman
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Many seniors inevitably find themselves cash-strapped during retirement. For some, that stems from an overreliance on Social Security. For others, it's a matter of higher-than-expected healthcare costs rearing their ugly head. Either way, the equity seniors have in their homes is often their most viable source of income in a pinch, but to access it, many resort to a product that comes with a huge number of drawbacks: the reverse mortgage.

How reverse mortgages work

With a regular mortgage, you take out a loan to finance your home and pay it back over time. With a reverse mortgage, you effectively convert the equity you have in your home into a source of cash. Rather than pay a lender, you get paid, but in exchange, you give up the equity you've built up in your home.

Now the upside of a reverse mortgage is that it's fairly easy to qualify for if the equity in your home is there and you meet other criteria for eligibility, including being at least 62 years of age. The drawbacks, however, include high closing costs and the fact that that loan is due when you pass away or vacate your home. If you decide to relocate in retirement and have a reverse mortgage, that loan will come due -- even if you're not yet ready to sell.

A safer alternative to reverse mortgages

If your need for money is driving you to consider a reverse mortgage, there's one option it pays to look at first: renting out your home instead. Think about it: The purpose of a reverse mortgage is to access money, but in exchange, you bind yourself to a rather strict agreement that comes with its share of fees.

When you take in a tenant, you don't give up the equity you've built in your home; the only thing you give up is a share of your rental income to the IRS. But that way, you retain control over your home. You can sell it when you want to, leave it to your heirs, or vacate it for a number of years and move back without worry.

Of course, not every home is suited to taking in a tenant, but if yours has a separate living space, like a finished basement or garage, then finding someone to pay you rent may be more feasible. Furthermore, if you're older and are having an increasingly hard time maintaining your home, you may be able to find a tenant who's willing to pitch in. Granted, you may need to offer reduced rent in exchange, but either way, that tenant could wind up being a help to you.

Of course, there's another option to consider when you need money and don't want to take out a reverse mortgage -- taking out a home equity loan. But in that case, you'll still have a loan to pay back, and you'll face certain risks -- like the fact that your home could be foreclosed upon if you fall behind on your loan payments.

Therefore, rather than borrow money in some shape or form, it pays to consider turning your home into a source of cash. It could be just the thing that buys you the breathing room you need to enjoy retirement rather than struggle through it.

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