Alternatives to Reverse Mortgages: Exploring Options

For so many homeowners, a reverse mortgage can be an appealing solution. 

Before you commit, however, consider this: less than 50,000 borrowers took out reverse mortgages in 2018, compared to 2.5 million that used other types of home equity debt (cash-out refinancing or a home equity loan or line of credit).¹

There’s a reason reverse mortgages aren’t more popular—they’re complex debts that come with significant risks. Plus, there are options including downsizing and sell and stay transactions that allow you to convert your home equity without taking on new debt. 

Below are six alternatives to reverse mortgages to help you decide what will work best for you.

Understanding Reverse Mortgages: Pros and Cons

What if someone paid you every month to remain in your home? Reverse mortgages sound like a too-good-to-be-true deal, but they are in reality a debt (mortgage) that has both benefits and drawbacks. 

The borrower receives either monthly income, a line of credit, a lump sum, or a combination of these. But instead of monthly payments like most loans, repayment isn’t due until the homeowner dies or the property changes hands. 

Unlike traditional mortgages, reverse mortgages are available from a limited lender pool. Most of these lenders are approved by the FHA (Federal Housing Administration) to offer the federally insured HECM (home equity conversion mortgage) which is the most commonly issued type of reverse mortgage.^1,2

Pros: 

• Can provide a homeowner with monthly payments to supplement income 
• Borrower can also choose a lump-sum, limited-time monthly, or line of credit mortgage payment 
• A way to continue living at home for equity-rich, cash-poor homeowners
• Loan only due upon homeowner’s death or the sale or transfer of the house
• Closing costs, fees, and interest can be rolled into the loan, payable at property transfer³

Cons:

• Only available to homeowners age 62 or older
• Loss of home equity; house can’t pay for assisted living or new home if the owner moves
• Requires ongoing mortgage insurance
• High closing costs and fees

Finally, as with any product aimed at seniors, the reverse mortgage market attracts a high number of unscrupulous vendors who promote fraudulent or misleading services. More so than with any other type of home equity conversion, it’s critical to understand all the contract details and work with a reputable reverse mortgage lender.

Reverse mortgage loan summary: 

• Credit score – No minimum score, just timely property payments in the past two years⁴
• Loan max – Up to 30% – 60% of equity based on age, home’s value, and other factors⁵
• Interest rate – Average HECM rate range 7.06% – 7.43% (as of September 2023)⁶

#1 Home Equity Loans vs. Reverse Mortgages

Now let’s breakdown a reverse mortgage vs. home equity loan. So long as you retain at least 20% equity in your home, you can take out a home equity loan at any age. They’re fixed-interest, lump-sum loans that you can repay over 10, 15, or 30 years with monthly repayments that include both interest and principal. 

While home equity loans can be used for any reason, they’re often taken out for big-ticket needs such as education, medical bills, or major home remodeling. Generally, borrowers are advised against using home equity loans to support living expenses, so you’re advised to seek professional guidance if you opt to use a home equity loan to fund income-producing retirement investments.

Home equity loan summary: 

• Credit score – Minimum credit score for most lenders is between 620 and 700⁷
• Loan max – Typically up to 80% or 85% of equity⁷
• Interest rate – Average fixed rate range 8.01% – 9.91% (as of September 2023)⁸

#2 The Benefits of a HELOC Over a Reverse Mortgage

A HELOC, or home equity line of credit, is similar to a home equity loan in that your loan is secured by your property, risks the loss of your home if you can’t repay it, and has similar credit history requirements. 

However, instead of a lump sum, you’re opening up a line of credit that you can use or not use as needed. There are two stages to a HELOC: 

1. The draw period, when you can use your credit and make interest-only payments, and
2. The repayment period, when your credit line closes and you make principal-plus-interest monthly payments.

HELOC summary: 

• Credit score – The minimum HELOC credit score for most lenders is between 620 and 700⁷
• Loan max – Typically up to 80% or 85% of equity⁷
• Interest rate – Average variable rate range 8.46% – 9.71% (as of September 2023)⁸

#3 Consider a Cash-Out Refinance

If you don’t yet own your home in full, you can also borrow against it with a cash-out refi. Instead of adding another loan to your monthly bills, you’ll refinance your primary mortgage. Your lender will provide: 

1. The funds to pay off your existing mortgage
2. An extra amount of cash back to use as you like

Monthly principal-plus-interest repayments will begin immediately after closing, replacing your previous mortgage payments. A cash-out refinance can be useful to free up cash for major projects, but think carefully before refinancing your existing mortgage to a higher interest rate. 

Cash-out refi summary: 

• Credit score – Minimum credit score for most lenders is 620⁹
• Loan max – Typically up to 80% of equity¹⁰
• Interest rate – Average fixed rate range 8.03% – 8.05% for 30-year fixed (as of September 2023)^11,12

#4 Sell and Downsize: An Alternative Strategy

New mortgages and loans aren’t the only alternatives to reverse mortgages. Many, especially older adults, choose to scale down to a smaller home, particularly if their property was sized to house now-grown children. 

You might pay more to live in a one-bedroom apartment in New York City than a sprawling midwestern rambler, but in most circumstances, downsizing is a path to reducing monthly housing expenses. In addition to trading down to fewer square feet, smaller homes mean: 

• Lower utility bills 
• Less upkeep expense
• Smaller property tax and homeowner’s insurance cost

The sale of your current home will exchange your full equity for cash, and if you’re looking to supplement your budget, you can work with a financial planner to invest in income-producing annuities or other accounts.

#5 Exploring Home Equity Sharing Arrangements

With a home equity sharing agreement, instead of taking on new debt, you actually sell a minority ownership stake in your property to an investment company. 

Don’t worry—it doesn’t mean the investors can drop by for movie night or list your spare room on Airbnb. They do, however, get a big payout at the end of the contract term (10 – 30 years) or when you sell the house (whichever comes first).¹³

There are no monthly payments to or from you, no interest rate, and easier financial qualifications, but all that comes at a price. When the repayment is due, you’ll owe a lump sum of the equity value originally advanced plus the investment company’s share of the home’s appreciation. 

Home equity sharing summary: 

• Credit score – Minimum credit score tends to be 500
• Loan max – Limited to 17.5% or 30% of equity
• Interest rate – N/A; the investor’s profit is connected to how much your property value increases over time rather than interest collected on a debt

#6 The Sell and Stay Alternative

A sell and stay transaction combines two contracts into a single event. At closing, you’ll: 

1. Sell your property
2. Sign a lease

At the same time, you’ll get the benefit of having a landlord who: 

• Pays property insurance
• Pays property tax
• Covers essential repairs

You’ll cash out your home equity based and avoid the exhausting process of staging and showing your house to prospective buyers that comes with a traditional sale as well as juggling all the tasks and schedules of a move. 

Making the Right Choice for Your Financial Future

When you want to convert home equity to cash in later years, a reverse mortgage isn’t your only choice. Equity-based loans such as cash-out mortgages, home equity loans, and HELOCs are among the reverse mortgage financing alternatives available to you.

To free up your equity without hiring movers, we invite you to explore Truehold's sell and stay transaction. Give us a call and a Truehold representative will review the process with you to see if a sell and stay transaction is a good fit for your financial situation and goals.

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Sources: 

1. Investopedia. Reverse Mortgages in America: The Statistics. https://www.investopedia.com/reverse-mortgages-america-statistics-5224801

2. U.S. Department of Housing and Urban Development. HUD FHA Reverse Mortgage for Seniors (HECM). https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome

3. Forbes. Reverse Mortgages: How They Work And Who They’re Good For. https://www.forbes.com/advisor/mortgages/reverse-mortgages/

4. All Reverse Mortgage, Inc. Credit Requirements for a Reverse Mortgage in 2023. https://reverse.mortgage/credit-requirements

5. RetirementLiving. 2023 Reverse Mortgage Lending Limits. https://www.retirementliving.com/reverse-mortgage-lending-limits

6. All Reverse Mortgage, Inc. Current Reverse Mortgage Rates: Today’s Rates, APR | ARLO™. https://reverse.mortgage/rates

7. Bankrate. Requirements for a home equity loan or HELOC in 2023. https://www.bankrate.com/home-equity/requirements-to-borrow-from-home-equity/

8. Bankrate. Current home equity interest rates. https://www.bankrate.com/home-equity/current-interest-rates/

9. Bankrate. Cash-out refinance: How it works and when to do it. https://www.bankrate.com/mortgages/cash-out-refinancing/

10. Investopedia. Cash-Out Refinance. https://www.investopedia.com/terms/c/cashout_refinance.as

11. Bankrate. Compare current mortgage rates for today. https://www.bankrate.com/mortgages/mortgage-rates/

12. CNN Underscored. Know the pros and cons before you take cash out of your home with a refinance. https://www.cnn.com/2020/11/23/cnn-underscored/cash-out-refinance-pros-and-cons/index.html

13. NerdWallet. What Is a Home Equity Sharing Agreement? https://www.nerdwallet.com/article/mortgages/shared-appreciation-home-equity