Alternatives to a Reverse Mortgage for Senior Homeowners

Introduction to alternatives to a reverse mortgage

Seniors have plenty of good alternatives to a reverse mortgage, known as a home equity conversion mortgage (HECM). That doesn’t mean that HECMs are always bad; it’s just that they’re not always the best solution for a senior homeowner seeking extra cash flow.

Technically, an HECM is the type of reverse mortgage that’s partly guaranteed by the government. You can still get wholly private-sector reverse mortgages. But you should take even more care in this less-regulated field. Scam artists and other predators lurk there.

In this article, we’ll be exploring the pros and cons of reverse mortgages and seeing how they stack up against other ways of raising finance when you’re a senior.

In this article (Skip to...)

• What is a reverse mortgage?
• Pros and cons
• Reverse mortgage alternatives
• The bottom line
• Reverse mortgage FAQ

What is a reverse mortgage and how does it work?

Before we look at alternatives to a reverse mortgage, we should check out the real thing. So, how does a reverse mortgage work?

Well, to borrow you must be at least 62 years old, own your own home, and have a low or zero mortgage loan balance. Your lender is unlikely to be very interested in your credit score, income or existing debt burden because you won’t be making any monthly payments on the loan.

Wha-a-at? No monthly payments? Nope, none at all. You can see why reverse mortgages were so popular when they first emerged.

A diminishing asset

But the no-payments thing is a double-edged sword, which is why reverse mortgages are less common now. Because, each month, the balance on your home loan ticks up by the amount your payment would have been, including cumulative interest. And, when the time comes to pay, these reverse mortgages can turn out to have been very expensive indeed.

That time when you must pay arrives when you vacate the home. Perhaps you find you’d prefer to live in a retirement facility, care home or with your adult children or other family members. You may be disappointed by the amount you get to keep when you sell your home. Or maybe you die while you’re still living in your home. Your problems are over but your kids might not get the inheritance they were hoping for.

A lifeline for some

You can see that some people will still be keen on reverse mortgages. For instance, those with poor credit, low retirement incomes, or a high existing debt burden, may find it hard to get approved for other sorts of borrowing, such as a personal loan. And those with no (or estranged) offspring might not care that their share of the value of their home is dwindling fast.

Others, however, may wish to examine alternatives to a reverse mortgage. And we’ll get to those soon. But, first, let’s lay out the pros and cons.

Pros and cons of a reverse mortgage

Reverse mortgages, which enable homeowners to turn a portion of their home equity into funds, present various benefits and drawbacks. Here are a few:

Pros

1. No monthly mortgage payments — None, so no late fees, either
2. Use the proceeds for any purpose — Pay for in-home care; consolidate your debts; boost your income through investments or an annuity; improve your home or adapt it for your special needs; top up your savings;
3. Relatively easy to get — Your reverse mortgage lender is likely to approve your application if you have a solid credit score, income, and little-to-no existing debts

For some, these will be powerful reasons to choose a reverse mortgage.

Cons

1. Reverse mortgages can be expensive over time — They often come with higher closing costs and interest rates than traditional mortgages and other home equity products
2. Those high costs can whittle away your share of the value of your home, leaving you or your heirs with less than expected when you move out of the home
3. If you fail to keep up with homeowners insurance premiums and property taxes, you run the risk of foreclosure. In fact, your reverse mortgage lender can seize your home through foreclosure. You should also keep up with any homeowners association fees
4. You must maintain your current home in good condition so that it doesn’t lose value
5. If you have any, you must immediately zero your existing mortgage balance and settle debts to the federal government from the proceeds of an HECM
6. Reverse mortgages can affect your eligibility for Supplemental Security Income, Medicaid, and other government programs. Check the possible implications for your claims
7. If you opt for an HECM, you’ll have to undertake and pay for an education course and financial assessment. However, these can protect you and might be seen as a pro
8. Scam artists are known to target those seeking all types of reverse mortgages but especially those that aren’t HECMs. Beware.
9. You must live in the home for most of the year. In other words, it must be your primary residence
10. You should avoid getting a reverse mortgage too soon. Suppose you get yours at 62 and live to be 92 or 102. Realistically, how much will be left to keep you going in your final years?

For some, these will be powerful downsides of a reverse mortgage.

Alternatives to a reverse mortgage

For most, there are plenty of alternatives to a reverse mortgage. Some of the following are recommended by federal regulator the Consumer Financial Protection Bureau (CFPB).

Note that, just like reverse mortgages, any money released by these strategies can be used for any purpose. However, any of the proceeds of a refinance, home equity loan, or home equity line of credit (HELOC) you use to improve your home may get you a tax break. Check with your tax professional.

Sell and downsize your home

In one way, this couldn’t be easier. You sell your home, buy a less expensive one, and pocket the difference. Ideally, you could pay off your mortgage and buy your next place without any loan. And that would also save you closing costs and future repayments and interest.

However, some people struggle to downsize. They find it hard to dispose of the cherished items that won’t fit in the smaller home. If that’s a dealbreaker for you, consider relocating to an area where property prices are lower for a house of the same size.

Read Downsizing Your Home.

Refinance

When this article was being written, we’d just been through a period when mortgage rates had risen steeply, at one point nearing 8% for a conventional, 30-year, fixed-rate mortgage. And it very rarely makes sense to refinance from a lower interest rate to a higher one.

However, recently, mortgage rates have been falling, and there are signs that a positive downward trend could last some time. Check mortgage rates today to see whether a refinance could benefit you by lowering your monthly payments or freeing up a lump sum. Use our mortgage calculator to do the math.

Take out a HELOC

A HELOC is a second mortgage. It comes in two phases: the draw period, during which you can take out cash and repay it as often as you want, up to your credit limit. You pay a variable interest rate only on your current balance. Think credit card.

After perhaps a decade (you largely decide how long), you enter the repayment phase. You can’t take out any more money unless you refinance and must pay down the balance. But you typically get 10-20 years to do so, which isn’t a huge burden for most.

HELOCs tend to have lower — sometimes zero — closing costs than a refinance or home equity loan.

Apply for a home equity loan

A home equity loan is a second mortgage, like a HELOC. However, it’s a straightforward repayment loan with what’s typically a fixed interest rate.

That means your first monthly payment is identical to your last and all the others in between. So, your budgeting couldn’t be easier. Again, you can largely decide whether you want a longer loan term with lower payments but a larger total interest cost or a shorter loan term with higher payments but lower costs.

Home equity loans tend to have higher closing costs than HELOCs but lower ones than refinances. And, if your current mortgage rate is lower than your new one would be, you can save with a home equity loan compared to a refinance. When refinancing, you pay the higher rate on your entire mortgage loan. With a home equity loan, you leave your existing rate on your mortgage in place and pay a higher rate only on your new borrowing.

Not sure whether to choose a HELOC or home equity loan? Read HELOC vs. home equity loan: Compare pros and cons.

Rent your home out

For many people, their home is their biggest, most profitable, and most prized asset. And they want to hold onto it forever, or at least for as long as possible.

One way to increase cash flow is to quit the property and rent it out. You can then move to somewhere smaller or less expensive. You could either buy the new home using a mortgage or second mortgage or simply rent it for less than you’re going to receive from your tenants.

Sounds easy? Well, nothing’s that straightforward. So, before you decide, read How to become a landlord in 2024: Start earning rental income.

Other alternatives to a reverse mortgage

The CFPB suggests that you explore ways of cutting your expenses before you decide on a reverse mortgage. Of course, most people will already have taken sensible measures assess their financial situation and rein in their household budget.

But are you aware of programs that may help with home repairs, utilities, and fuel payments? These are often run by state, county, and city governments. The CFPB recommends using benefitscheckup.org to track down these and others where you live. Click the link and enter your Zip Code.

The bottom line: Alternatives to a reverse mortgage

A reverse mortgage or HECM may be your best or only way forward. But think carefully before you commit to one.

And be sure to explore all the alternatives to a reverse mortgage. Financially, this is a huge step. And you may think it worth consulting an independent financial advisor rather than relying on a salesperson working on commission to give you a full and accurate picture.

Assuming you need a lump sum, the main alternatives include, downsizing, a cash-out refinance, a home equity loan or a HELOC. But you could also rent out your home, get a lodger, pare back your outgoings, or get help from state or local authorities with some of your living expenses.

If you take away just one message from this article, it should be this: Don’t take such a major step without a great deal of thought, research, and, preferably, expert independent advice.

Reverse mortgage FAQ