6 Alternatives to a reverse mortgage

Reverse mortgages are a common way for retirees to supplement their income from Social Security, investments, and other assets. Home equity conversion mortgages, or HECMs, are the most common type of reverse mortgage.

The HECM market is strictly regulated by the Federal Housing Administration (FHA), which has led to significant improvements in borrower safety over the years. Still, there are big drawbacks to consider. Reverse mortgage problems for heirs aren’t unheard-of, for example, given the complexity of how these programs work.

That’s why it’s important to consider alternatives to reverse mortgages as a part of your research. We’ll share some of the most common options to help you make an informed decision.

How a reverse mortgage works

Reverse mortgages work — as the name implies — by paying you money from the equity you’ve accrued in your home over time as you paid down your original mortgage. Your balance will increase, although no monthly mortgage payment is required. When you no longer need the home, your lender will take the repayment from the proceeds from selling your home.

In order to understand how reverse mortgages work, it’s helpful to compare the benefits and the downsides:

Pros of a reverse mortgage

• Flexible payment options: Choose a lump sum, a monthly installment, or a line of credit. You may be able to mix-and-match or switch between these options.
• Benefits for surviving spouses: You can list your “non-borrowing spouse” on the loan so that they can remain in the home after you’re no longer there, even if they’re not a borrower on the loan.
• Pay off your existing mortgage: You’ll need to use some of your loan proceeds to pay off your current mortgage first, if you still have one. That shrinks your loan size, but you also don’t need to worry about juggling two mortgages, either.
• No monthly mortgage payments: The biggest benefit for many retirees is simply not having to make monthly payments any longer — a huge help for retirees on a fixed income.
• Can’t owe more than home value: It’s possible for your loan balance to grow higher than your home is worth. If that happens, you won’t ever owe more than its current value.
• Benefits for heirs to acquire home: Your heirs will get the first opportunity to purchase the home from your reverse mortgage lender. If the balance exceeds what your home is worth, they’ll be able to purchase it at a 5% discount from its appraised value.

Cons of a reverse mortgage

• Must be 62 years or older: Unlike alternatives to reverse mortgages, you and any co-borrowers must be at least 62 years of age or older.
• Complicated financing tool: Reverse mortgages operate unlike any other financing option, and it can be difficult to understand how they fit into your long-term plans without expert guidance.
• Expensive fees and interest: Reverse mortgage terms and interest rates are determined partially by your age. The younger you are, the more expensive it’ll typically be, and you’ll likely qualify for less funding, too.
• Foreclosure-triggering events: You must keep up with property taxes, homeowners' insurance, and home repairs. In addition, you must also live in your home full-time. If you don’t uphold these terms, your lender can foreclose on your home.
• Loan balance grows over time: Unlike alternatives to reverse mortgages, your loan balance increases over time. That’s because interest keeps accruing while you’re not making payments.
• Mandatory counseling requirements: You’ll need to complete a counseling session with a counselor who will explain your options and how a reverse mortgage program works. In return, you’ll receive a certificate you can present to a lender to apply.
• Reverse mortgage problems for heirs: If your heirs can’t pay off the reverse mortgage balance by taking out a new mortgage in their own names, then your home could be sold to someone else. Your heirs also won’t receive any of the leftover proceeds from the home sale if your balance exceeds your home value.

Alternatives to reverse mortgages

A reverse mortgage may or may not be the answer for your situation, but you don’t know unless you compare it with other reverse mortgage alternatives. Knowing your other options could reinforce whether a reverse mortgage is right for you, at the very least, or whether something else might work better.

We’ll compare some of the most common reverse mortgage alternatives here.

Renting out your home

Best if: You want to keep your home and earn an income.

Pros

• No monthly payments
• Retain equity in your home
• Earn extra retirement income
• Easier to transfer ownership to heirs
• Diversifies your assets in case of stock market swings

Cons

• Less privacy
• Tenant management duties
• Extra legal and tax considerations
• Requires an extra living space on your property
• Lower returns if you hire a management company

Whether it’s your primary home or a secondary home, renting out your house can provide extra income that reduces your dependence on other sources, like Social Security or your existing savings. This can be an especially good option for retirees who want to avoid reverse mortgage problems for heirs, since it offers a smooth way to transfer property to loved ones.

However, you’ll need a suitable living area for tenants and a team of advisors to help you make the strategy work, since you’re essentially becoming a landlord. It’s a good idea to speak with a financial advisor and a tax professional who can ensure you’ll gain more benefits than it costs, as well as a property management company to handle the physical and business aspects of renting out the home.

Selling your home

Best if: You’re ready to downsize or move to a new location.

Pros

• Large lump sum
• No monthly payments
• Move to a more suitable and/or affordable location

Cons

• Packing, moving, and selling your home is a lot of work
• Adapting to big changes in living situations can be tough
• Parting with your belongings and home can take an emotional toll
• May owe real estate taxes if your home has appreciated significantly

You might prefer to sell your home when it becomes more of a hassle than it’s worth, or maybe you’re eager to move closer to family. Either way, selling your home can provide welcome funds to jump-start the next phase of your life. That’s especially true if you’re moving from a high-cost-of-living location to a more affordable area.

Moving is never easy, though, especially if you’ve lived in your current home for a long time. Downsizing considerations aside, you may owe taxes if you stand to gain more than $250,000 from your home sale ($500,000 if you’re married). Retirees who live in rural or low-cost-of-living areas may also be surprised by how expensive real estate is elsewhere.

Home equity investment

Best if: You have a large, one-time expense and cannot afford monthly payments.

Pros

• No age limits
• Assumable by heirs
• No monthly payments
• Long, 30-year term length
• Can keep your home if you move out
• Homeowner protection cap puts guardrails on costs

Cons

• Complicated funding structure
• Uncertain costs over investment term horizon
• Foreclosure risk for not meeting contract terms
• Investor protection measures increase long-term costs
• Limited availability across locations and property types

A home equity investment (HEI) offers many of the benefits of a reverse mortgage, yet doesn’t rely on debt or ever-diminishing home equity. In fact, HEIs reward both parties — you and the company — because of its unique structure.

Instead of making monthly payments, you’ll repay the funds as a lump sum in 30 years, along with a slice of your home’s future equity. If your home doesn’t appreciate much, you won’t pay much for the funding. Conversely, as you gain more equity in your home, you’ll repay a larger amount later on.

This means you can’t compare costs directly with reverse mortgage alternatives upfront. However, unlike a reverse mortgage, your heirs can take over the HEI and keep the home without needing to apply for financing on their own.

Home equity loan

Best if: You have a large, one-time expense and can afford monthly payments.

Pros

• Fixed interest rate
• No age requirement
• Predictable monthly payment
• Less temptation to overborrow
• Can keep your home if you move out
• Rebuild equity over time as you repay the debt

Cons

• Requires monthly payments
• Foreclosure risk for not meeting contract terms
• Lowers potential equity for heirs during repayment
• Less flexibility to borrow additional funds if needed
• Requires sufficient equity and good creditworthiness

A home equity loan operates similarly to a personal loan, although it uses your home as collateral for the debt. This can be a good reverse mortgage alternative if you’re looking to pay for a large expense, such as renovating your home to age in place. A cash-out refinance loan offers the same advantage, although home equity loans are typically better if you already have a good interest rate on your mortgage that you don’t want to upend.

You will need sufficient income and credit to qualify and make your monthly debt payments. This offers you a chance to rebuild the equity in your home, rather than deplete it over time as with a reverse mortgage.

Home equity line of credit (HELOC)

Best if: You can afford monthly payments and want a flexible way to borrow.

Pros

• No age requirement
• Interest-only payments to start
• Can keep your home if you move out
• Rebuild equity over time as you repay the debt
• Borrrow additional funds during the draw period

Cons

• Variable interest rates
• Monthly payments can change
• Complicated repayment structure
• Foreclosure risk for not meeting contract terms
• Requires sufficient equity and good creditworthiness

A HELOC allows you to borrow as you need, up to a pre-set draw limit, similar to a credit card or the line of credit feature on a reverse mortgage. You’ll only be required to pay interest during a 10 to 15-year-long draw period, followed by a 10 to 20-year-long repayment period when you make full principal and interest payments.

Managing payments on a HELOC can be challenging if you’re on a fixed income because payments can change based on which borrowing phase you’re in, the current interest rate environment, and how much you borrow. Retirees who can manage these challenges, however, can benefit from a flexible way to borrow without reducing their equity as much as a reverse mortgage.

Cash-out refinance

Best if: You can qualify for lower interest rates and afford higher monthly mortgage payments.

Pros

• No age requirement
• Can keep your home if you move out
• Rebuild equity over time as you repay the debt
• Opportunity to replace main mortgage with a lower-rate loan

Cons

• Monthly payments may be higher
• Foreclosure risk for not meeting contract terms
• Requires sufficient equity and good creditworthiness

A cash-out refinance also offers the opportunity to get lump-sum funding, similar to a home equity loan, but it rolls all your home debts into a single loan. You’ll have one larger loan to repay with a cash-out refinance, in other words, rather than two separate debts.

This makes a cash-out refinance somewhat similar to a reverse mortgage, which requires you to roll any remaining mortgage balance into the debt. You will need to make monthly payments over time; however, this also helps rebuild the equity in your home, making it easier to pass on to your heirs.

Final thoughts

Finding a good alternative to a reverse mortgage depends mostly on your goals and your ability to keep up with the terms of your funding. If you can’t afford monthly payments in retirement, consider selling your home, renting it out, or taking out a home equity investment. Those who’d prefer to keep their home and can afford the payments can also consider a home equity loan, HELOC, or cash-out refinance.