9 Smart Alternatives to a Reverse Mortgage

If you’re considering getting a reverse mortgage (or your parent told you they might apply for one), there are pros and cons to consider first. Although reverse mortgages can provide financial relief for seniors aged 62 and up, these mortgages can also come with high interest rates and fees.

Additionally, getting a reverse mortgage can make estate planning more challenging. Some requirements, like living in the home as a primary residence, can be difficult if you or your loved one has health problems that require a move. So, before signing the dotted line, consider these nine alternatives to reverse mortgages first.

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1. Home equity line of credit (HELOC)

A reverse mortgage isn’t the only financial product that can turn your home’s equity into cash. A HELOC is a revolving line of credit that uses your home as collateral. This enables you to tap into your home’s equity and use funds as needed. You can borrow up to a certain amount and make interest-only payments during the draw period, which can last five to 20 years.

A HELOC is best for homeowners with a large amount of equity in their homes who don’t want to sell anytime soon. It’s also for homeowners with good credit who can make timely monthly payments.

While a reverse mortgage doesn’t require monthly payments, reverse mortgages tend to have higher interest rates than HELOCs. Figure is a good option for a HELOC because borrowers get 100% of the loan amount in a lump sum. This can help improve cash flow for seniors, making it easier for them to stay home.

2. Home sale-leaseback

A home sale-leaseback is when you sell your home to a person or a company and then rent it back from them. This allows you to sell your house but stay put as a renter. Some sale-leasebacks are short-term, like if you rent your home for a month or two after selling it while you wait to move into your new home.

The company Truehold allows renters to stay longer, typically 12 to 24 months, giving you ample time to plan your next steps. Of course, if you want to stay in your home for many years, another option on this list might be preferable, like a HELOC or home equity loan.

The benefit of a home sale-leaseback is that it isn’t a debt product like a reverse mortgage. You will not have a loan. Instead, you will keep the proceeds from the sale of your home and pay rent. You’ll have a landlord who will be responsible for maintenance, which benefits many seniors who no longer want to be responsible for home upkeep.

3. Home equity loan

A home equity loan is similar to a HELOC in that you use your home’s equity as collateral to get access to cash. However, a home equity loan is structured similarly to a personal loan. With a home equity loan, you get a lump sum upfront and pay your loan back in equal payments over a set term.

The benefit is that you can predict your monthly payments, making budgeting easier. Another benefit of a home equity loan is that it typically has lower fees and costs than a reverse mortgage.

However, home equity loans do have stricter credit and income requirements. To see what home equity loan options are available, you can compare lenders at LendingTree.

4. Mortgage refinance (cash-out refinance)

Another common alternative to a reverse mortgage is applying for a cash-out refinance. A cash-out refinance is when you replace your current mortgage with a new, larger mortgage and take out the difference in cash. This is common when interest rates are low, and homeowners can save on overall costs.

This option may not be ideal for homeowners who locked in interest rates below 4% in recent years. Replacing a low-interest mortgage with a new one at a higher rate could significantly increase your total interest costs over time. To explore current mortgage refinance options and compare multiple lenders, visit Lending Tree.

Ultimately, a mortgage refinance is better for people with a steady income who can make regular mortgage payments. A reverse mortgage is for people who are struggling to make their payments and want a way to stay in their homes without additional monthly payments.

5. Home equity agreement

Another alternative to reverse mortgages is getting a home equity agreement. Many people aren’t aware this financial product exists, and several benefits make it a viable alternative to reverse mortgages. A home equity agreement, also called a home equity investment, is when a homeowner sells a portion of their home’s equity to a HEA company.

This is similar to a business selling a portion of equity or ownership to an investor. Homeowners get a lump sum and do not have to make monthly payments. Instead, homeowners repay the company after a set term or when they refinance or sell their home. HEI companies benefit from the future appreciation of the home.

For seniors who want to access their equity and use it for living expenses, companies like Hometap allow you to get up to $600,000 in as little as three weeks. Additionally, because a home equity investment is tied to your house, you do not have to have excellent credit to qualify. In fact, Hometap has a minimum credit score requirement of just 500 and no income requirements.

The combination of no income requirements and a low minimum credit score makes a home equity agreement a viable option for many seniors and retirees. Although it varies by lender, make sure to compare overall costs, including fees, with other alternatives on this list to ensure you’re choosing the best option for you.

6. Sell your home and downsize

According to research from the Joint Center for Housing Studies of Harvard University, 11.2 million older adults were “housing cost-burdened,” described as housing costs taking up more than 30% of their income. This can prevent older adults from achieving their financial goals, retiring, and remaining in their homes long-term.

One way to alleviate financial stress quickly is to sell your home and downsize. This is ideal for empty nesters who might not need as much space. It’s also good for adults who have built up considerable home equity and want to access that cash for day-to-day expenses.

Downsizing can be preferable to taking out a reverse mortgage because instead of taking on additional debt, you reduce your expenses by moving to a smaller, more affordable home. An AARP survey showed that of older adults who want to move in the future, 71% say the reason is because of mortgage or rent costs and 55% said it was due to high property taxes.

7. Rent out part of your home

According to a Pew Research study, the number of adults living in multi-generational households is growing. These multi-generational household members don’t have to be related. In fact, multi-generational roommates are a growing trend that even has a name, “boommates,” according to WBUR, Boston’s NPR station.

The benefit of taking on a roommate as a senior is twofold. First, and most importantly, seniors can combat the high cost of living by earning an income from renters. Rental income can help people stay in their homes and reduce their mortgage costs without taking out a loan like a reverse mortgage.

Secondly, having a roommate can alleviate loneliness. The Journal of the American Medical Association (JAMA) reported a link between loneliness and serious health issues, such as dementia, strokes, and depression. A national poll showed that 37% of adults between 50 and 80 years old experienced loneliness, and having a roommate can provide companionship.

8. Explore government assistance programs

Depending on income, government programs can help lower the price of housing, healthcare, food, and energy for seniors. Most of these programs are targeted to low-income households.

Here are some options:

Supplemental Security Income Program (SSI): Provides cash assistance to low-income seniors and disabled adults
SNAP/Food Stamps: Provides food for any low-income individual
Senior Farmers’ Market Nutrition Program: Provides locally grown fruit and vegetables to low-income senior
Medicare Savings Programs: Offers financial help to pay for health insurance for qualified seniors.
Low Income Home Energy Assistance Program (LIHEAP): Offers financial assistance to low-income individuals to help with the cost of energy-related home repairs and energy bills.

Enrolling in government programs to help you with food, energy, and medical costs can help to increase your cash flow, which in turn can help make your housing expenses more manageable.

9. Family support

A final option would be to ask your family for support. This is best for families with good, trusting relationships. Additionally, it’s for people who understand the pros and cons of it. For example, there might be an opportunity to ask a family member to take over the mortgage in exchange for leaving them the home in your will.

You can also ask a family member to help you financially in exchange for childcare or meal preparation. Whatever you choose, just make sure that expectations are clear. You and whichever family member supports you must understand your agreement so there are no hard feelings or confusion over financial responsibilities in the future.

When I help clients choose between a reverse mortgage or an alternative, we will follow a few steps:
First, we will discuss the purpose of the funds and the pros and cons of a reverse mortgage, as well as how it will impact the client’s financial plan during their lives and the impact on their estate planning. Second, I will list each option and compare each feature. Ideally, I request that they include a family member or trusted friend who is authorized to be included in the client’s financial discussions.

The main factors we focus on are the short-, mid-, and long-term implications, with a focus on what the client needs and wants (what makes them most comfortable). The overarching goal is to customize the best plan for their circumstance and desires.

Erin Kinkade , CFP®, ChFC®

Takeaway

If you’re considering getting a reverse mortgage, it’s important to know that you can tap into your home’s equity in several ways. Some of the financial products or living options mentioned above might be better depending on your personal situation, the amount of equity in your home, and your relationship with your family.

Just like choosing your original mortgage, reviewing all your options is important. Compare at least three to five lenders and research various financial products to ensure you’re making the best choice for you in the long term. Additionally, don’t forget about government assistance programs if you need help with other living costs, like food and energy expenses.