Alternatives to Reverse Mortgage: Key Options to Consider

Many older homeowners who need extra cash to make ends meet are looking to one of their most valuable assets to provide it — their homes. Reverse mortgages allow homeowners with a paid-off (or mostly paid-off) home to cash in on the equity without selling the home or having to move. 

While this loan can be a helpful financial tool for many, not all who need to make use of their home’s value will qualify. This guide will cover how reverse mortgages work, how to qualify, as well as several reverse mortgage alternatives that can provide access to your home’s equity. 

What is a reverse mortgage?

A reverse mortgage allows you to tap into the equity in your home to fund expenses during retirement. Unlike a traditional mortgage where the borrower makes monthly principal and interest payments, the bank pays the borrower. Payments can be in a lump sum, monthly installments, or a line of credit.

The home’s equity is used as collateral for the loan. As in a traditional mortgage, monthly interest accrues, which eats away at the equity in the reverse-mortgaged property. Borrowers also need to front the initial costs of underwriting the mortgage, which may include application and origination fees, appraisal, title search, monthly service charges, and other closing costs. However, reverse mortgages typically don’t require any repayment until the last living borrower dies, sells the home or moves away. The loan is typically repaid once the heirs sell the house. 

“Most reverse mortgages go through the Home Equity Conversion Mortgage program, which is federally insured by FHA,” says David Harrington, real estate broker and mortgage lender with The HECM Group. “These reverse mortgages conform to FHA loan limits, as well as requirements like the condition of the property, mortgage insurance premium (MIP), and the upfront funding fee (which is 2% of the loan amount, as opposed to the 1.75% fee for regular FHA mortgages).”

Pros and cons of a reverse mortgage

Why might you consider alternatives to a reverse mortgage?

Reverse mortgages can be a great way to shore up your retirement savings or get needed funds for home repairs or medical expenses. However, they’re not ideal for every situation. Here are a few scenarios where an alternative method of acquiring a large sum of money might be preferable:

• You’re younger than 62: You must be at least this age to qualify for most reverse mortgages, so younger borrowers must look elsewhere or wait until they qualify.
• You don’t have sufficient equity in your home: How much equity you can cash out in a reverse mortgage is determined by the principal limit, calculated based on the age of the borrower, interest rate, and maximum claim amount. If you don’t have enough equity in your home, a reverse mortgage may be off the table.
• You’re struggling to afford your home: If property taxes, maintenance, and a mortgage payment are too much to handle, selling your home and downsizing may make more sense for you.
• You want cheaper loan costs: Reverse mortgages come with hefty closing costs, so there may be alternatives to get you the money you need without as large of an upfront expense.
• You can’t or don’t want to maintain your home: Homes need to be in good shape to qualify for reverse mortgages. If you can’t make needed repairs on your home or choose not to, the bank can call the loan due.
• You plan to move soon: Harrington says if you plan to move in the next few years, the closing costs of a reverse mortgage may not be worth it.

Home equity loans vs. reverse mortgages

A home equity loan may be a reasonable alternative to a reverse mortgage. It allows you to borrow against your equity and receive a lump sum, but you don’t have to own your house outright. You’ll be responsible for fixed-interest monthly installments to repay the loan over the term, typically five to 20 years. If you don’t make the appropriate payments, your lender may foreclose on your home.

Lenders typically allow you to borrow up to 80% of the equity in your home, which may be helpful for a homeowner who has substantial equity in their home but doesn’t qualify for a reverse mortgage. Plus, Harrington says, the fees for home equity loans tend to be cheaper than taking out a reverse mortgage.

HELOCs as an alternative to reverse mortgages

If you want to be able to take cash out as needed, a home equity line of credit (HELOC) may be the appropriate choice. Think of a HELOC as a credit card that’s backed by your home equity. HELOCs typically have variable interest rates, but they tend to be cheaper than credit cards.

Many HELOCs allow you to withdraw the cash you need up to a certain amount during an initial draw period, usually between five and 10 years. Withdrawals are made by check, online transfer, or credit card attached to the account. You make interest payments during the draw period and begin repaying the loan once the draw period ends (you also have the option to repay the principal as you go). 

Like home equity loans, HELOCs are also less expensive than reverse mortgages.

Selling your home instead of a reverse mortgage

Perhaps the most straightforward way to access your house’s equity is to sell it. While there are no strings attached to this method of procuring cash, it could leave you without a place to call home. However, many retirees decide to downsize their homes or rent so they no longer have to worry about property taxes or maintenance. 

Other financial strategies for retirement

If none of these options are a good fit to get you the money you need, here are a few additional strategies to help you with financial planning in retirement: 

• Traditional refinancing: For seniors who are still working, it may make sense to do a cash-out refinance using a traditional mortgage. Whether this is a viable solution depends on the borrower’s financial standing, income level, and the interest rates available. Harrington notes that because income isn’t a factor, reverse mortgages tend to be easier to qualify for than traditional mortgages for retirees.
• Family financing: Harrington notes that sometimes family members can act as the bank for a reverse mortgage-type situation. The family member puts a lien on the house and pays the homeowner each month. Once the homeowner dies, the family member inherits the house. 
• Home repair grants: If the homeowner needs money to cover home repairs, they may qualify for a USDA grant or loan to help. Community programs such as Habitat for Humanity and Rebuilding Together can also help with home repairs.