Best Alternatives to a Reverse Mortgage (Ranked for 2023)
If you’re an older homeowner, it means you have wealth in home equity.
Which is great! There’s just one problem: You can’t buy groceries with a garage – or pay your bills with an attic.
So how can you turn your home equity into money you can actually…you know, spend?
One option is a reverse mortgage – but that can be expensive.
Luckily, there are plenty of alternatives to a reverse mortgage.
Home equity accounts for 27.8% of household wealth for Americans. But how can that value be tapped?
I’ll walk you through some of the best options below.
What is a Reverse Mortgage?
A Reverse Mortgage or a Home Equity Conversion Mortgage (HECM) is a financial tool that allows seniors to borrow money using their home as security.
It’s only available to people 62 or older, and it allows them to turn their home equity into usable cash.
Let’s say you’re a 70-year-old homeowner, and need disposable income. Your biggest asset is likely the equity you have in your home – the portion of the home that you own outright.
A reverse mortgage allows you to turn some of that equity into cash.
Here’s what the process looks like:
First, the lender will give you the money you’re borrowing. There are lots of ways to receive it, including:
- A lump sum received right at the start of the loan
- Monthly payments
- An open line of credit (meaning you can spend the money as you need it)
- Some combination of payments and/or a line of credit
So you’re borrowing money, but when do you have to pay that money back?
The answer is: not until you’ve sold your home, moved out, or passed away.
That’s what makes a reverse mortgage so unique.
With a normal mortgage, you make monthly payments. So the balance owed on the loan decreases and your equity in the home increases.
With a reverse mortgage, it’s the opposite. Or, shall we say, the “reverse.” As time goes by, fees and interests are added to the balance – meaning you owe more and more.
A ballooning balance that you don’t pay off? Sounds crazy!
But here’s the thing: The plan is usually to sell the home eventually (often after the homeowner has passed away), then use the proceeds from the sale to pay off the balance.
By law, reverse mortgages must be structured so that the balance won’t exceed the value of the home used as security.
And even if something strange happens (like the home suddenly decreasing in value) and the balance does become higher, mortgage insurance will step in to cover the difference.
Pros and Cons of a Reverse Mortgage
Reverse mortgages make a lot of sense for some people – and none at all for others.
Before deciding what’s best for you, make sure you consider both the pros and cons.
- You can supplement your income. Reverse mortgages turn home equity into cold-hard cash. This is cash you can use to buy groceries.
- You can stay in your home. One alternative to a reverse mortgage is to sell your home, buy a cheaper one, and then live on the proceeds. But maybe you don’t want to relocate! With a reverse mortgage, you won’t have to.
- More flexibility for heirs. If you pass away with a reverse mortgage, your heirs will have options. They can sell the home to pay off the loan balance or keep the home and repay the balance some other way.
- Reverse mortgages come with costs. You’ll face lender fees, closing costs, servicing fees, and charges related to the FHA (Federal Housing Administration) insurance.
- Foreclosure is still possible. You can have your home taken if you don’t pay property taxes or required fees.
- Taking out a reverse mortgage can make you ineligible for other benefits. Medicaid and Social Security could both be affected, so make sure you look into the details before signing on the dotted line.
- The rules can get confusing. You can’t be forced to pay your loan balance as long as you’re a “resident” in your home, but what happens if you’re moved to a nursing facility? Are you technically still “residing” in your home? These types of questions can get tricky, and you might end up needing a lawyer.
9 Best Alternatives to a Reverse Mortgage
So let’s say you’re a senior – or someone helping a senior – and you’ve got the following goals:
- Goal #1: Stay in the same home
- Goal #2: Get more disposable income
- Goal #3: Avoid financial risk
A reverse mortgage isn’t the only way to reach these objectives.
Here are some of the best alternatives to a reverse mortgage.
1 – Refinance Your Existing Mortgage
Refinancing the mortgage you already have is one of the most straightforward alternatives to a reverse mortgage. Your goal is to give yourself more money and financial flexibility, right?
Well, if you refinance your mortgage to lower your monthly payments, you can use the money you save for living expenses.
Lowering your mortgage’s interest rate is one of the best ways to refinance. Do that, and you’re bound to pay less each month.
2 – Take Out a Home Equity Loan
A home equity loan allows you to borrow money by using your home equity as security.
What is home equity, again?
It’s the value of your home minus what you still owe in your mortgage.
So basically, it’s the portion of your home’s value that you already own outright.
With a home equity loan, you’ll get a lump sum at the beginning. Then, you’ll repay the loan, along with interest, on a monthly basis.
3 – Take Out a Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is like a home equity loan, except you get access to credit instead of a lump sum.
Here’s what that process looks like in practice: You go to a lender and use your home equity to show you can be trusted with a “line of credit.”
That “line of credit” means you can borrow money, but only when you want to.
So basically, a HELOC provides a safety net, and it’s generally cheaper than a reverse mortgage.
4 – Unlock
Unlock is a financial service that serves the same purpose as a reverse mortgage: to turn home equity into money you can actually use.
The difference is that Unlock doesn’t provide a loan.
Instead, it gives you cash upfront in exchange for a share of the proceeds when the home is sold (which must happen within ten years). If you decide not to sell, you also have the option of buying Unlock out when the agreement term is up.
Here’s how it works:
- Unlock assesses the value of your home.
- Unlock gives you cash upfront.
- When the home is sold, the homeowner (or heirs) repays the original loan – and Unlock keeps an agreed-upon share of the home’s increase in value since the date of the original agreement.
The lack of interest and monthly payments makes Unlock one of the best alternatives to a reverse mortgage.
5 – Hometap
Hometap is another service that reaches agreements with homeowners to help them “tap” into their home equity.
Hometap’s process is similar to Unlock’s: They pay you money upfront, then you have to settle the investment (usually by selling the home) within ten years.
One major difference between Hometap and Unlock is that Hometap is available in slightly fewer states. Currently, Hometap is available in Massachusetts, Michigan, Minnesota, Nevada, Ohio, South Carolina, and Utah.
6 – Unison
Unison is yet another service for accessing your home equity. Like Unlock and Hometap, the company gives you money upfront, then expects a share of the proceeds when you sell later on.
There’s one big difference that makes Unision less accessible than its competitors: It’s only available to people with a credit score of 680 or higher.
7 – Sell Your Home to Your Children
When you sell your home to your kids, everyone can win.
You get the disposable income you need, and your children get the wealth and security that comes with owning the family home.
Usually, you’d go through all the official channels. This means getting everything in writing and agreeing to a monthly payment plan.
Of course, this only works under certain circumstances. That is, your offspring need to be willing and able to buy the home.
8 – Rent Out Your Home
Want to stay in your home but don’t necessarily need access to all of it?
Then it could make sense to rent out a section.
There are multiple ways to do this.
You could rent out a single room, then provide access to common areas like the kitchen and bathroom. You could also create a separate apartment.
You can also decide what type of timeframe you’d like to rent for.
Want the security that comes from receiving steady rent checks? Then try to find a tenant for a year-long lease.
Looking for just an injection of cash here or there? Then short-term rentals (think: Airbnb) could be perfect.
9 – Sell Other Assets
Your home might be your largest asset – but that doesn’t mean it’s your only asset.
Do you have a car you’re no longer using?
Are there stocks or bonds that would make sense to sell off?
If you’ve got assets you can afford to part with, selling them is one of the best alternatives to a reverse mortgage.
Commonly Asked Questions About Alternatives to a Reverse Mortgage
What Can I Do Other Than a Reverse Mortgage?
Alternatives to a reverse mortgage include refinancing your existing mortgage, taking out a home equity loan or a home equity line of credit (HELOC), or using a service like Unlock that pays you for a share of your home’s future appreciation in value.
How Can I Avoid a Reverse Mortgage?
You can avoid a reverse mortgage by finding other ways to get the funds you need to live on. Options include selling your house, renting out a portion of your home, selling other assets, or using an alternative method like Unlock to tap your home’s equity.
Why Don’t Banks Recommend Reverse Mortgages?
Banks will sometimes advise against reverse mortgages because they can be expensive and risky. Why expensive? Because they come with fees and insurance charges. Why risky? Because you can lose your home if you fall behind on property taxes or fees.
What are 3 Types of Reverse Mortgages?
Reverse mortgages differ in how they pay out the money. The three types include:
- Insured by the Federal Housing Administration (FHA)
- Single-purpose loans given out by state and local governments
Private Reverse Mortgage?
Private reverse mortgages differ from “standard” or Home Equity Conversion Mortgages (HECMs) in that they’re not federally insured. There’s one main reason to seek out a private (AKA “proprietary”) reverse mortgage: You want more money – and your home has more value – than what federally insured loans allow for.
Why You Should Never Get a Reverse Mortgage?
I wouldn’t say you should “never” get a reverse mortgage, but here’s why it could prove problematic:
- It’s expensive (fees, charges, closing costs, oh my!)
- You could end up ineligible for key government benefits
- You could have to pay off the balance if you leave your home for health reasons
How to Get Out of a Reverse Mortgage?
Some options for getting out of a reverse mortgage include:
- Selling your home and using the proceeds to pay off your balance
- Paying off the balance with your own money
- Refinancing the reverse mortgage to get better terms
- Refinancing to turn the reverse mortgage into a standard loan
Can You Walk Away From a Reverse Mortgage?
You can “walk away” from a reverse mortgage, but let’s be clear about what that entails. You hand the lender the deed to your house, then find a new place to live. That’s far from ideal, and there are usually better options.