For many retirement-age homeowners, their house is one of their most important financial assets. If you’ve lived in your home for a long time and paid off a significant portion of your existing mortgage, your home likely holds a large amount of untapped and trapped equity.
Often seen as a home equity loan alternative for retirement-age homeowners, a reverse mortgage offers one opportunity to turn that equity into wealth. As with most home equity financing options, a reverse mortgage provides the means to tap into otherwise inaccessible wealth. Due to the standard terms and conditions, lenders market reverse mortgages primarily towards seniors. However, a reverse mortgage may not be their—or others’—best choice for accessing home equity.
If this method of financing doesn’t offer the best home equity solution, what options provide a better reverse mortgage alternative? Are there any reverse mortgage alternatives that can offer more flexibility and less risk, particularly for those who may have bad credit or are not yet eligible for a jumbo reverse mortgage?
The most common alternatives to a reverse mortgage include:
- Home equity loans
- Home equity line of credit
Before we dive into each alternative, it’s important to review reverse mortgages and their pros and cons to properly stack them up against your options,
What is a Reverse Mortgage?
A reverse mortgage is a secured loan that allows (senior) homeowners to borrow against the value of their home. As with all secure loans, the reverse mortgage borrower must offer collateral in case of failure to meet the agreed-upon terms and conditions. As with most other home equity financing options, the collateral for a reverse mortgage program is the borrower’s home.
There are three types of reverse mortgages:
- Home equity conversion mortgage (HECM loan)
- Proprietary reverse mortgage
- Single-purpose reverse mortgage
These types of reverse mortgages can be further divided into Federal Housing Administration (FHA) and non-FHA loans, with the FHA reverse mortgage being one of the most common types of reverse mortgages.
One important reverse mortgage fact to keep in mind is that unlike other home equity financing alternatives, a reverse mortgage doesn’t require continual repayments. Instead, repayment is due in full upon the borrower’s sale of their home or their passing. This condition is one of the primary reasons lenders advertise reverse mortgages to senior homeowners.
However, there are several pros and cons to consider and steps you may need to take. For example, you must attend a reverse mortgage counseling session and undergo a financial evaluation if you acquire a home equity conversion mortgage (HECM loan), which is a government-insured reverse mortgage. Nonetheless, it’s important to consider all possible aspects of reverse mortgages and their alternatives. to find the best option for you.
What Benefits Do Reverse Mortgages Offer?
Some older homeowners are interested in reverse mortgages because it allows them to turn their home’s otherwise inaccessible equity into cash without the burden of a monthly mortgage payment. In addition, because you have already accrued home equity, it can be less risky than other financing options, such as a personal loan or credit card.
Following reverse mortgage loan approval, reverse mortgage borrowers have the option to receive a monthly check or a lump sum. Both provide helpful sources of income for retirees, but the former remains subject to a variable interest rate while the latter stays fixed.
The Downsides of a Reverse Mortgage
While a reverse mortgage may be a good option for some homeowners, several reasons prevent its use as a one-size-fits-all solution. As with many loans, the drawbacks can outweigh the benefits due to strict rules and high costs. The following are things to take into account when considering your reverse mortgage options:
- Collateral – As with many home equity financing options, your home acts as the loan’s collateral. While you will not be responsible for continual loan payments as with other home equity financing, you may still lose your home if you do not meet your property taxes, home insurance, and other loan terms and conditions.
- Age Restrictions – You will not qualify for a reverse mortgage if you are younger than 62 years old. The reasoning behind the age restriction is that younger homeowners will not have had the time to accumulate enough equity in their homes and interest compounds until repayment.
- High Costs – There are a variety of fees associated with reverse mortgages: origination fee, servicing fee, closing costs, mortgage insurance premium, and interest rates:
- Origination fee, charged by lenders upon entering the loan agreement to cover the cost of the initial loan processing
- Servicing fees cover the costs associated with administering the loan, including monitoring property taxes and insurance
- Closing costs, an umbrella term that can refer to a variety of fees and costs associated with property risks and administrative tasks
- Insurance, taken out to protect against extreme circumstances such as foreclosure or the reverse mortgage lender going out of business
- Interest which accrues over the entire life of the loan and is collected upon repayment
- Lack of Flexibility in Occupancy – Entering a reverse mortgage agreement can make it more challenging to sell the property or rent it out to different occupants. It can also create complications if you try to move out of the house or add a name to the property title. Further, if the person who enters into the loan passes away, any spouses, relatives, friends, or roommates who also live in the home may be forced to leave.
- Impacts on Heirs – Many senior homeowners are concerned about the wealth that they will leave behind when they pass away. As the borrower takes out money against their home’s equity, this value decreases. This means that your heirs will receive a smaller inheritance than they would have if you had not taken out a reverse mortgage—or may not receive anything from the home’s sale at all.
For some homeowners, these factors are deal breakers. Thankfully, homeowners have options when it comes to seeking an alternative to reverse mortgages.
Alternatives to Reverse Mortgages
There are several strong reasons why a reverse mortgage may not be the right choice for many homeowners. Alternative ways to get equity out of your home include:
- Home equity loans
- Home equity line of credit
Home Equity Loans
A home equity loan or second mortgage is another kind of loan that uses home equity as collateral. But the borrower typically makes monthly payments on a disbursed lump sum or withdrawals from a line of credit.
Further, the barriers to entry are different. There are no age restrictions, but there can be credit score and income requirements. Home equity loans are more appropriate for some homeowners who are too young for a reverse mortgage.
Home equity loans may be less costly than a reverse mortgage because they carry fewer fees, but they do have higher interest rates than other alternatives, and have the added burden of the monthly payment and the same risk of losing your home. Be sure to fully weigh the pros and cons of home equity loans before going with this option.
Home Equity Lines of Credit
A Home Equity Line of Credit (HELOC) is another reverse mortgage alternative that many homeowners may consider. Like a home equity loan, a HELOC utilizes the equity of your home as collateral but operates differently. Instead of disbursing a lump sum, a HELOC functions more like a credit card, providing a line of credit that homeowners can draw upon as needed.
HELOCs are flexible, allowing homeowners to withdraw money whenever they need it within a specific timeframe known as the “draw period.” This period typically lasts about 5 to 10 years. After this period, the repayment phase begins, requiring homeowners to start repaying what they borrowed.
However, it’s essential to use this flexibility wisely. Borrowing more than you need can lead to unnecessary debt and potentially put your home at risk. As with any financial decision, it’s crucial to weigh HELOC pros and cons, consider your individual needs, and consult with a financial advisor before deciding on a HELOC.
Sale-leaseback solutions are a particularly unique alternative to reverse mortgage agreements. In a sale-leaseback, you sell your home to a buyer who then leases your home back to you. This method enables you to convert your home’s value into an available cash flow while allowing you to keep living in your house until you repurchase it or decide to move—particularly helpful for individuals considering a move in the future.
Unlike traditional options such as a home equity loan or reverse mortgage, sale-leaseback agreements have few restrictions on credit, income, or other barriers to entry. It is not a loan, so there are no monthly payments other than monthly market rent.
Rather than slowly tapping into equity over time, this option would allow you to convert your home’s equity into immediately available cash. Further, some sale-leaseback solutions offer the opportunity to collect any appreciation on the home’s equity later on.
Another option is to refinance your current, existing mortgage. Updating your mortgage timeline can lower monthly payments and decrease your monthly financial burden in the short term.
However, refinancing can impact your retirement plan, particularly if you are nearing retirement age. Expanding your mortgage timeline, such as with a 30-year contract, can result in increased financial burdens later on when you no longer have a steady income source. Just be sure to review the types of mortgage refinance options if you consider this route.
While it may seem like a more extreme option, downsizing just makes sense sometimes, particularly for older homeowners. Selling your home and moving into a less expensive residence is a great way to profit from your home’s equity. Despite the advantages, the logistics, stress, and emotions of downsizing may be difficult for many homeowners to manage.
However, it’s essential to remember the unexpected benefits of downsizing your home. A smaller property can also be logistically helpful—some seniors may prefer a home without stairs, some may not want or need the extra room. Downsizing can improve quality of life from both a financial and logistical perspective.
You might be asking when to downsize. The answer is usually dependent on your unique situation, but a good rule of thumb is to consider it when maintaining the current home becomes too costly or challenging.
Take Back Your Financial Freedom
For many homeowners, a reverse mortgage is not an ideal solution. Whether it be the age restrictions, the high fees, or the lack of flexibility, odds are you are better off exploring other options. For individuals wary of loans or who are not ready to move out of their house, sale-leaseback agreements offer a great alternative.
For many retirement-age homeowners, their house is one of their most important financial assets. If you’ve lived in your home for a long time and paid off a significant portion of your mortgage, your home likely holds a large amount of untapped equity. If you are still unsure of alternative options for reverse mortgages, consult a financial advisor to speak about other options, such as a home equity line of credit, refinancing, or the pros and cons of downsizing.
- Investopedia. Reverse Mortgage.
- National Reverse Mortgage Lenders Association. Application/Fees/Disclosures.
- Nolo. I am 65 and my wife is much younger. Can we get a reverse mortgage?
- Consumer Financial Protection Bureau. If I have a reverse mortgage loan, will my children or heirs be able to keep my home after I die?
- Consumer Financial Protection Bureau. Can anyone take out a reverse mortgage loan?