6 Alternatives to Reverse Mortgages

Whether you’re approaching retirement age or you’re a senior in the middle of your retirement years, you may be thinking of how to support yourself financially for the long haul. On average, Americans have about $141,542 saved for retirement, according to one 2022 estimate. However, the median savings sits at just $35,345. That won’t last you long when it comes to covering housing, utilities, medical expenses, and day-to-day living expenses for the years to come.

For many seniors, their home is one of their most significant assets. This is why some take reverse mortgages into consideration. A reverse mortgage is a special type of home loan, earmarked only for homeowners who are 62 and older with a substantial amount of home equity to tap into. And with the average price for a single-family home exceeding $350,000, that’s a lot of home equity to benefit from.

But reverse mortgages aren’t for everyone. For starters, they’re one of the most expensive ways to borrow, and they have stringent eligibility requirements not everyone can meet. Depending on your circumstances, they can also limit your options to help your loved ones.

If you’ve ruled out reverse mortgages, don’t fret. Here’s an in-depth look at six alternative options available, each with different qualifications, to help you meet your financial needs in retirement.

All About Reverse Mortgages

Reverse mortgages are a type of financing available to seniors who are 62 and older with a substantial amount of home equity to tap into.  With a traditional mortgage, homeowners pay down their home loan in monthly installments to build up home equity, but a reverse mortgage does the opposite: instead of making payments towards your loan, you’ll receive a sum of cash from your lender that’s taken from your home equity.

Unlike many of the options below, there are no monthly repayments on a reverse mortgage, making them a convenient financing tool for seniors. You won’t have to pay back a penny on your reverse mortgage until you sell your property, move out of the house, or pass away. This total amount includes the principal amount you’ve borrowed, along with interest and fees.

This is one way seniors can tap into their nest egg to supplement their income while keeping their home as their primary residence. But reverse mortgages are complicated loans to set up and come with a lengthy list of fees and charges, which is why they may not be the best bet for homeowners.

6 Alternatives to Reverse Mortgages

Home Equity Loans

A home equity loan provides homeowners with a single lump sum of cash, which seniors can access once they’re approved for their loan. These loans come with a fixed term, ranging from 5 to 30 years, depending on how much you’re borrowing. You’ll need to repay this loan via fixed monthly installments throughout the life of the loan.

Home equity loans are nicknamed “second mortgages” because you’re using your home equity as collateral. Ideally, you’ve already paid off your mortgage, so you’ll only need to manage your home equity loan repayments in your budget.

It’s worth noting these loans, along with home equity lines of credit, which we’ll discuss below, are much more popular for seniors. In 2022, it’s estimated qualified seniors took out more than 60,000 reverse mortgages. On the other hand, research suggests there were more than 2.5 million loan originations for home equity loans, HELOCs and cash-out refinances.

Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, is like a personal line of credit or a credit card, except you’re using your home equity as collateral on your account. With a HELOC, you’re provided with a credit limit, which is the total amount you can withdraw from your loan. You can also withdraw only what’s needed, then repay the funds to replenish your account and borrow from it again.

In a nutshell, you’re getting a lump sum of cash just like you would with a home equity loan, but you’re only responsible for repaying what you use. You’ll likely also score a lower interest rate compared to a reverse mortgage.

Refinancing your Home Loan

If you’re still carrying a balance on your mortgage, refinancing is a viable option for seniors, especially if you can secure a lower interest rate.

Refinancing your mortgage means you can change your terms and interest rate to lower your monthly payments and save on interest. Both free up some cash for you to apply toward your other costs.

In the event of a lower interest rate, you could save a fair bit of money over the lifetime of your loan, cut back on the size of your monthly payments, and continue to build home equity. If your priority is keeping your home equity intact so your heirs have an inheritance, this is a great option.

The catch with refinancing is you must have some income, through a pension or other revenue streams, and a decent credit score. You’re also on the hook for paying closing costs and interest. Just like the options above, you’re putting your home equity on the line. If you can’t keep up with monthly payments, you risk foreclosure and losing the roof over your head.

Another option available to homeowners is cash-out refinancing. This entails replacing your existing mortgage with a new one that comes with an all-new loan amount, interest rate, terms, and monthly payment. When you refinance your existing mortgage with a cash-out refi, you’re freeing up a portion of your home equity as a cash payout. You can borrow up to 80 percent of your home’s value.

Sell your Home and Downsize

While the options above keep you in your existing home, you might want to consider selling your home to unlock full access to your home equity. This is an option worth exploring if your home is larger than you need – for example, if you’re an empty-nester with too much space to maintain inside and outside of your home. You may be better off selling your property, and moving to a smaller, more affordable home, which you can rent or buy outright from the proceeds of your home sale.

Keep in mind, you will not walk away with the full amount from your home sale. When you’re doing a comparison of options, factor in the cost of selling your home, including real estate commission fees, closing costs, and the costs involved with buying or renting a new property.

If, however, you have loved ones you plan on moving in with or you plan on moving into a residence home, downsizing may be one of the most straightforward alternatives to a reverse mortgage.

Rent Out a Portion of your Home

If you’re turning to a reverse mortgage because you’re short on cash, homeowners – in all ages and life stages – should consider renting out a portion of the home to generate extra income.

This is a great opportunity if you don’t want to move out and you have extra space in your home that’s in good condition for a tenant. Renting out a part of your home could look like renting a spare bedroom to renting out an entire part of your home, such as a basement apartment.

You’ll need to screen potential tenants carefully with the help of professional agents and family members you trust. You’ll be in close quarters with this tenant, so your safety and security come first. This is why this may not be the option in every senior’s household.

You may have a family member or close friend who is looking for a spare bedroom, which is a win-win scenario for both parties as you can earn an extra income and live with a loved one.

Lower your Expenses

How short on cash are you? Do some number-crunching and pore over your monthly budget and expenses line-by-line to figure out where you may be able to cut back on spending.

This is the most cost-effective route to take if you don’t want to take out or don’t qualify for a reverse mortgage.

Take stock of your various income streams, including your pension and government-provided benefits. You can also do some research into state and local programs that help seniors with bills and day-to-day expenses.

3 Steps Before Choosing a Reverse Mortgage Alternative

Deciding on whether a reverse mortgage or an alternative route is your best way forward isn’t an easy financial decision. Take inventory of the following factors below to help you decide:

Figure out your Home Equity

Gain clarity first on how much skin you have in the game, determining whether you’re living in your home mortgage-free, if your home has shot up in market value, or if you’re still managing mortgage payments. This step will help you learn how much you can borrow – with a reverse mortgage and any of the loan options above – and if you have enough equity to get the financing you need.

Compare Costs

While some options come with closing costs, loan origination fees, and even monthly maintenance fees, others may come with a different kind of expense, such as making renovations to your home to accommodate a tenant and losing your privacy for extra rental income.

Shop around, zeroing in on the best rates and loan terms available to you. If you’re thinking of selling or renting out your space, focus on how much income these options may yield. With thorough research, you’ll have a bird’s eye view of all the routes to choose from and which makes the most sense for you – financially and for your personal life.

Consult with a Qualified Professional

Did you know you must complete a 90-minute financial counseling session with a professional that’s approved by the U.S. Department for Housing and Urban Development to proceed with a reverse mortgage application? And statistics show that only 40 percent of seniors who complete this training move forward with the process.

Regardless of which option you’re thinking of taking, talk to a qualified professional, such as a real estate attorney, tax specialist, or financial advisor before moving ahead with any kind of loan, sale, or refinancing. Bring your trusted loved ones with you, as these professionals will account for your financial situation and retirement goals before making recommendations for you.

Bottom Line

Reverse mortgages are one of many options available to seniors who have plenty of home equity to which they’re trying to gain access. With a reverse mortgage, you won’t have to make a single loan repayment until you move out, sell your property, or pass away. Your other options, such as a HELOC, home equity loan, or refinancing your mortgage keep your home equity completely intact, but you’ll need to stay on top of loan repayments.

Ultimately, each option comes with a cost. Your job is to do your research about your options, shop around for the best rates, and work with your loved ones and qualified financial professionals to help you make the best decision for your financial needs.