5 Alternatives To A Reverse Mortgage

If you’re a homeowner who’s at least 62, you may be able to use the equity in your home by taking out a reverse mortgage. This may be a good option if you want to supplement your income during retirement.

With a reverse mortgage, instead of making monthly payments on the money you receive, the balance is due when you move, sell the home, or die. But with eligibility criteria, high closing fees, and estate-planning consequences, reverse mortgages may not be the best solution for everyone.

How reverse mortgages work

A reverse mortgage is a special type of loan where you borrow against the equity in your home and receive funds from the lender. There are several types of reverse mortgages, but Home Equity Conversion Mortgages (HECMs) are the most common.

You’ll remain the owner of your home and use the proceeds to pay off the balance on your existing mortgage. With a HECM, the rest of the funds can be used for just about anything, from living expenses to debt consolidation, in-home care, home improvements, or an emergency fund.

Repayment is deferred until you sell the home or move out. If you die, then your heirs can sell the home, repay the balance, and keep any excess funds.

To qualify for a reverse mortgage, you — and the home — will need to fit the eligibility criteria. The lender will check that:

• You’re at least 62 years old.
• You own the home outright or have a low balance. Requirements vary with each lender.
• You attend a counseling session with an agency that’s approved by the Department of Housing and Urban Development.
• You or your spouse live in the home as a primary residence.
• The home is in good condition.

You’ll also need to continue covering all property tax payments, homeowners insurance premiums, and other household maintenance costs while you live in the home.

Downsides to a reverse mortgage

Reverse mortgages come with downsides that might make them unsuitable for homeowners in certain situations.

• The reverse mortgage may have high upfront costs. You’ll typically have to pay closing costs and fees associated with the loan, such as an initial mortgage insurance premium.
• You’ll reduce the equity in your home. A reverse mortgage allows you to borrow against your home equity, which decreases your equity and increases your debt.
• The lender can ask for the balance early. The balance will need to be repaid if you don’t maintain the home, fall behind on property taxes and homeowners insurance, establish another home as your primary residence, or pass away. If you can’t repay, then the lender may foreclose on the property.
• You may outlive your proceeds. Depending on how you spend the funds from the reverse mortgage, you may run out of money.
• Heirs might not be able to keep the home. Your heirs may have options for keeping your home after you pass away, but it may also cost them money.

5 alternatives to a reverse mortgage

If you’re put off by the disadvantages of reverse mortgages, you have other options for tapping home equity.

1. Opt for a private reverse mortgage

Best for: Doing a reverse mortgage without the fees and little risk of foreclosure

While HECMs are the most common type of reverse mortgage, you don’t have to go this route. One alternative is to set up a private reverse mortgage, also known as an intra-family loan.

With this approach, your family members — usually your adult children — make regular payments to you, and they get those contributions back when it’s time to sell the house.

This may impact your estate planning and tax situation, so talk with a tax specialist or attorney beforehand.

2. Refinance your home

Best for: Passing your home to your heirs

If you have an existing mortgage, you might be able to swap out the loan with one that better meets your needs. With a rate-and-term refinance, you can lower the interest rate, change the loan term, or both. This can free up some cash in your budget.

A cash-out refinance can also help you cover a large expense because you take out a mortgage for more than you owe, pay off the principal on your old home loan, and keep the difference.

With both types of refinances, pay attention to the new loan term as it can affect your retirement plan. A longer-term mortgage will keep you in debt longer and may cost more in interest. Consider refinancing into a 10- or 15-year loan term.

Learn More: Refinance Program Options for Seniors

3. Sell and downsize

Best for: Reducing your overall expenses without incurring new debt

You may also decide to sell your home if you need less space and want to reduce your housing expenses. Some types of homes, such as condos or assisted living facilities, even take maintenance off your hands.

Seniors may also qualify for financial assistance toward utilities, home repairs, and property taxes through state and local government programs or the Administration for Community Living.

4. Get a home equity loan

Best if: Covering a large expense

A home equity loan is a second mortgage that allows you to borrow money using your home equity as collateral. The bank gives you a lump sum of money upfront that you’ll repay over a few years in equal installments.

This could be a cheaper way to borrow cash compared to a reverse mortgage, a credit card, or a personal loan. Plus, you keep the home in the process.

Check out: Should You Get a Home Equity Loan for Debt Consolidation?

5. Consider a HELOC

Best for: Borrowing money only when you need it

A home equity line of credit is another type of second mortgage, but you receive the funds differently. You get access to a line of credit that you can borrow from any time during the draw period, only paying interest on what you borrow.

Once the draw period ends, you have several years to repay any balance that remains. This could be a good safety net if you lack emergency savings.

Check out: Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose