8 Worthwhile Alternatives to a Reverse Mortgage

A reverse mortgage is a great tool for converting home equity into cash, but it’s not always the right fit. If it’s not right for you, there are some great alternatives to a reverse mortgage that help you achieve your financial goals. We’ll cover what they are and a few things to watch out for.

8 Alternatives to a Reverse Mortgage

I’ve worked with hundreds of retired homeowners over the years to help them determine if a reverse mortgage was a good fit for their financial needs.

In my opinion, the reverse mortgage is a great product, but it’s not always the best option. There are some situations where it doesn’t make sense.

If you’ve looked into a reverse mortgage, but aren’t sure if it’s right for you, consider getting a second opinion from a reverse mortgage counselor. You can also explore how much you can get and the various payout options available using our free reverse mortgage calculator.

If you’d like to explore some other options, read on. We’ll cover 8 alternatives to reverse mortgages that may be worth checking out.

1) Cash-Out Refinance

A cash-out refinance is one of the most common alternatives to a reverse mortgage. A cash-out refinance enables you to borrow more than your existing mortgage balance and receive the difference in cash.

You can use the proceeds for whatever you like, including debt consolidation, home improvements, paying medical bills, or making a large purchase.

You don’t need to have an existing mortgage to do a cash-out “refinance”. The process and qualifications are largely the same even if your home is free and clear.

Most lenders will lend up to 80% of your home’s value on a cash-out refinance. If you’re a veteran, you can often borrow up to 90% or 100% of your home’s value with a VA-backed loan.

There are three main advantages to a cash-out refinance:

1. Higher loan-to-values. You can borrow against more of your equity than with a reverse mortgage.
2. Interest rates. The interest rates are typically lower than other consumer loan products. The interest may also be tax-deductible.
3. Long loan terms. You can stretch the loan term to 30 years to keep your payments as low as possible.

There are a few disadvantages of a cash-out refinance:

1. Closing costs. Cash-out refinances are considered riskier by lenders, so the rates and closing costs are usually higher than non cash-out home loans. It’s normal to pay a slightly higher rate and a point or two with your closing costs.
2. Minimum loan amounts. The minimum loan amount is usually in the $50,000 to $75,000 range. If don’t need to borrow this much, then you may want to consider a HELOC, home equity loan, or personal loan (which we’ll cover shortly).
3. You will need to refinance an existing mortgage. This may not make sense if you have a low rate on your primary mortgage.
4. Monthly payment. Unlike a reverse mortgage, you’ll have a monthly payment for up to 30 years.

If you’re fine with the monthly payment, a cash-out refinance could be a good alternative to a reverse mortgage.

Check Current Cash-Out Refinance Interest Rates

2) Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is one of the most common alternatives to a reverse mortgage. A HELOC is a revolving loan that allows you to borrow against your home equity on an ongoing basis and at your convenience.

There are several advantages to a HELOC:

1. Flexibility. You borrow only what you need when you need it and you only pay interest on what you borrow.
2. Potentially lower monthly payments. HELOC payments are often lower than other loan options because they’re usually interest-only.
3. Smaller loan amounts. You can usually borrow less than what a cash-out refinance might require.
4. You can keep your primary loan. If you have a primary loan with a low rate, you don’t have to refinance it to borrow against your equity.
5. Lower closing costs. The closing costs are usually lower than a cash-out refinance.
6. Simpler application process. The application process is usually faster and simpler than a cash-out refinance.

Though they have a lot of advantages, HELOCs do come with risks:

1. Interest-only payments. You have to pay extra if you want to pay down your loan balance.
2. Adjustable rates. HELOC interest rates are usually based on the prime rate. If the prime rate increases, your interest rate and payment will increase as well.
3. Your lender can revoke, chop, or freeze your HELOC with little notice. Wells Fargo closed all of their outstanding HELOCs with almost no notice in the summer of 2021. Even people with high credit scores had their HELOCs revoked.
4. The recast. Most HELOCs allow you to withdraw funds for up to the first ten years of the loan. At the ten-year mark, the bank recalculates the loan into a full principal and interest payment that repays the balance over the remaining loan term. This can cause your payment to increase substantially if you have a large loan balance. If you can’t afford the payment, you could face foreclosure.

In my opinion, HELOCs are best for short-term borrowing. You don’t want to maintain a large balance over the long term because of the recast. I’ve worked with clients who were facing foreclosure because the recast resulted in a payment that was three or four times higher than it was during the draw period.

This is why I consider the HELOC one of the riskier alternatives to a reverse mortgage for retired homeowners.

I also recommend that you take the time to fully understand the loan terms before you get into a HELOC. The vast majority of people I’ve worked with who had HELOCs were completely unaware of how the recast works. It’s important to do your homework so you know what you’re getting into.

Check Current HELOC Interest Rates

3) Home Equity Loan

A home equity loan is similar to a cash-out refinance or HELOC in that it allows you to borrow against your home’s equity. Most home equity loans are written as second mortgages behind an existing primary mortgage, but you don’t need to already have a mortgage to get a home equity loan.

There are several advantages of home equity loan:

1. Smaller loan amounts. You can usually borrow less than what a cash-out refinance might require.
2. You can keep your primary loan. If you have a primary loan with a low rate, you don’t have to refinance it to borrow against your equity.
3. Lower closing costs. The closing costs are lower than a cash-out refinance.
4. Fixed rates. Most home equity loans have a fixed rate and term.
5. Simpler application process. The application process is usually faster and simpler than a cash-out refinance.

Home equity loans do have some potential disadvantages:

1. Higher rates than other loan options. Home equity loans usually have fixed rates, which tend to be higher than the rates on similar loans with adjustable rates (like a HELOC).
2. Higher payments. Home equity loans often have higher payments because usually have shorter loan terms than most cash-out refinance loans. This also means you’re paying off the loan faster – which is a good thing.
3. You have to borrow the full amount up front. Most home equity loans have only a lump sum payout, which means you have to borrow the full amount up front even if you don’t need all the money right now.

A home equity loan is one of the better alternatives to a reverse mortgage if you need just a modest amount of cash to pay off other debt or do home improvements.

Check Current Home Equity Loan Interest Rates

4) Personal Loan

If you have difficulty qualifying for a cash-out refinance, HELOC, or home equity loan because of income and/or credit, you may consider looking into a personal loan. A personal loan is an unsecured loan that can be used for a variety of purposes, including home improvements, debt consolidation, or making a large purchase.

Personal loans have several advantages:

1. No collateral required. It’s an unsecured loan, so it’s not tied to your home, car, or any other asset.
2. Fixed rates. Most personal loans have fixed interest rates. This makes your payments easy to budget because they never change.
3. Simple and fast application and approval process. Most lenders offer online applications and may approve you in just minutes. The loan proceeds are often released within a few days. If you need cash fast, a personal loan can be a great way to go.
4. Income verification. Many lenders don’t require you to verify your income. This can be helpful if you’ve been turned down for other loan products because of a high debt-to-income ratio.

Personal loans can be a great option, but they do have some potential disadvantages:

1. Smaller loan amounts. Because personal loans are unsecured, the maximum loan amounts are usually smaller than what you might get with a cash-out refinance, HELOC, or home equity loan. Having said that, some lenders do offer up to $200,000 on an unsecured loan, but they will expect you to have a stellar credit and financial profile.
2. Higher interest rates. Unsecured loans are riskier from a lending standpoint, so expect higher rates than a cash-out refinance, HELOC, or home equity loan.
3. Shorter loan terms. Loan terms are usually 36 to 60 months, which means your payment may be higher than other loan options. The upside is that you’re repaying the loan faster, which saves interest.

If you need a modest amount of money quickly, a personal loan could be a good alternative to a reverse mortgage, cash out mortgage, HELOC, or home equity loan.

Check Current Personal Loan Interest Rates

5) Home Equity Sharing Plan

One of the lesser-known alternatives to a reverse mortgage is a home equity sharing plan. A home equity sharing plan (or shared appreciation agreement) is a financial arrangement where a homeowner agrees to share a portion of future home value appreciation with an investor in exchange for a cash payment.

The main advantage of a home equity sharing plan is that it allows you to access cash without taking on additional debt. There are no monthly payments and you remain the owner of your home. The investor receives a share of your home’s appreciation when it is sold or refinanced.

A home equity sharing plan can be a good option if you have difficulty qualifying for a loan because of a low credit score or high debt-to-income ratio.

There are some potential drawbacks to a home equity sharing plan. First, you’re required to share a significant portion of your home’s future appreciation with the investor, which can limit your profits if you sell in the future.

The terms of the agreement may also be complex and difficult to understand. This can lead to misunderstandings and disputes between you and the investor. If you do consider a home equity sharing plan, make sure you understand the terms completely. You may also want to run the agreement by an attorney before you close.

If you’d like to learn more about a home equity sharing plan, check out our article here.

6) Sell Your Home And Downsize

Selling your home can offer several advantages, including cashing out your equity and downsizing to a smaller home that is cheaper and easier to maintain.

Selling a home is fairly straightforward if you work with an experienced real estate agent or broker. They can help you navigate the complex paperwork and legal requirements. They can also help you price your home appropriately and market it to potential buyers.

There are drawbacks to selling that can make it less appealing than other reverse mortgage alternatives. The selling process is often time-consuming and stressful, especially if you’re in a competitive market. It can be emotionally difficult to leave a home you’ve lived in and made memories in over the years.

Selling can also come with significant costs: agent commissions (3% to 6% of the sales price), home repairs or upgrades to make the home marketable, closing costs, and moving costs.

If your home has appreciated a lot, you may also face capital gains taxes. Make sure you talk to an accountant before you decide to sell your home.

If it does make sense to sell and downsize, you can use the proceeds of the sale to purchase a new home with a reverse mortgage. You bring your down payment and the bank finances the rest with no monthly mortgage payment. If you’d like to find out more about the HECM for purchase, check out our article here.

7) Cash-Out Auto Loan

This can be a great alternative to a reverse mortgage if you have lot of equity in your car and don’t need a huge amount of cash. Yes, you can borrow against the equity in your car. I’ve done it!

Here’s a few advantages of borrowing against your car’s equity versus getting a personal loan:

1. Lower rates than comparable personal loans. It’s a secured loan, so it’s safer from a lending standpoint than an unsecured personal loan. That should result in a lower interest rate than most personal loans.
2. Fast and simple to get. The application, approval, and funding process usually takes a few hours to a few days. You can get cash quickly.

Here are a few potential disadvantages:

1. You lose the car if you don’t make your payments. If you don’t make your payments, the lender will take the car.
2. Higher payments. Loan terms for auto loans are often shorter than cash our refinances, HELOCs, and home equity loans, so the payments are usually higher. However, this also means you pay off the balance faster.

8) Work Part Time or Start a Side Business

Another alternative to a reverse mortgage is working part-time or starting a side business. This article is focused more on financial products, but many past clients have chosen to go back to work to raise extra cash.

If you have expertise that lends itself to consulting work, that can be a great way to earn cash on your terms. You can work when you want, right? If you don’t want to work – don’t!

Working isn’t always feasible if health is an issue, but it can be a great way to get out of the house, keep the brain active, build new relationships, and make extra cash.

What to Avoid

I’ve worked with many mortgage clients who had payday or cash advance loans. We highly recommend avoiding such loans. They’re designed to keep you in debt and paying insane interest rates (sometimes 100% to 400% interest) for as long as possible.

Most borrowers don’t repay the payday or cash advance loans by the end of the loan term. The old loan usually gets rolled into a new loan (with more fees, of course) and the endless debt treadmill continues.

We also don’t recommend car title loans. These are very similar to cash-out auto loans, but usually come with predatory loan terms. If you want to borrow against your car, we recommend applying with a local bank or credit union – not a car title lender.

Frequently Asked Questions