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If you’re a homeowner who’s at least 62, you may be able to use the equity in your home by taking out a reverse mortgage. This may be a good option if you want to supplement your income during retirement.
With a reverse mortgage, instead of making monthly payments on the money you receive, the balance is due when you move, sell the home, or die. But with eligibility criteria, high closing fees, and estate-planning consequences, reverse mortgages may not be the best solution for everyone.
Here’s what you need to know about reverse mortgages, along with five alternatives to consider:
How reverse mortgages work
A reverse mortgage is a special type of loan where you borrow against the equity in your home and receive funds from the lender. There are several types of reverse mortgages, but Home Equity Conversion Mortgages (HECMs) are the most common.
You’ll remain the owner of your home and use the proceeds to pay off the balance on your existing mortgage. With a HECM, the rest of the funds can be used for just about anything, from living expenses to debt consolidation, in-home care, home improvements, or an emergency fund.
Repayment is deferred until you sell the home or move out. If you die, then your can heirs sell the home, repay the balance, and keep any excess funds.
- You’re at least 62 years old.
- You own the home outright or have a low balance. Requirements vary with each lender.
- You attend a counseling session with an agency that’s approved by the Department of Housing and Urban Development.
- You or your spouse live in the home as a primary residence.
- The home is in good condition.
You’ll also need to continue covering all property tax payments, homeowners insurance premiums, and other household maintenance costs while you live in the home.
Downsides to a reverse mortgage
Reverse mortgages come with downsides that might make them unsuitable for homeowners in certain situations.
- The reverse mortgage may have high upfront costs. You’ll typically have to pay closing costs and fees associated with the loan, such as an initial mortgage insurance premium.
- You’ll reduce the equity in your home. A reverse mortgage allows you to borrow against your home equity, which decreases your equity and increases your debt.
- The lender can ask for the balance early. The balance will need to be repaid if you don’t maintain the home, fall behind on property taxes and homeowners insurance, establish another home as your primary residence, or pass away. If you can’t repay, then the lender may foreclose on the property.
- You may outlive your proceeds. Depending on how you spend the funds from the reverse mortgage, you may run out of money.
- Heirs might not be able to keep the home. Your heirs may have options for keeping your home after you pass away, but it may also cost them money.
5 alternatives to a reverse mortgage
If you’re put off by the disadvantages of reverse mortgages, you have other options for tapping home equity.
1. Opt for a private reverse mortgage
Best for: Doing a reverse mortgage without the fees and little risk of foreclosure
While HECMs are the most common type of reverse mortgage, you don’t have to go this route. One alternative is to set up a private reverse mortgage, also known as an intra-family loan.
With this approach, your family members — usually your adult children — make regular payments to you, and they get those contributions back when it’s time to sell the house.
This may impact your estate planning and tax situation, so talk with a tax specialist or attorney beforehand.
| Pros | Cons |
|---|---|
| May be cheaper than going through a traditional lender | May have tax and estate-planning consequences |
| The home remains an asset for your heirs | Your family might not be able or willing to fund the loan |
2. Refinance your home
Best for: Passing your home to your heirs
If you have an existing mortgage, you might be able to swap out the loan with one that better meets your needs. With a rate-and-term refinance, you can lower the interest rate, change the loan term, or both. This can free up some cash in your budget.
A cash-out refinance can also help you cover a large expense because you take out a mortgage for more than you owe, pay off the principal on your old home loan, and keep the difference.
With both types of refinances, pay attention to the new loan term as it can affect your retirement plan. A longer-term mortgage will keep you in debt longer and may cost more in interest. Consider refinancing into a 10- or 15-year loan term.
| Pros | Cons |
|---|---|
| Keep some or all of the home equity you’ve built over the years | Your heirs will likely need to pay off the mortgage balance after you pass away |
| Pass on the home to your heirs | A cash-out refinance reduces your equity |
3. Sell and downsize
Best for: Reducing your overall expenses without incurring new debt
You may also decide to sell your home if you need less space and want to reduce your housing expenses. Some types of homes, such as condos or assisted living facilities, even take maintenance off your hands.
Seniors may also qualify for financial assistance toward utilities, home repairs, and property taxes through state and local government programs or the Administration for Community Living.
| Pros | Cons |
|---|---|
| Reduce your housing expenses | Selling your home and moving comes with costs |
| You won’t take on new debt | You’ll have to adjust to a new lifestyle and less space |
4. Get a home equity loan
Best for: Covering a large expense
A home equity loan is a second mortgage that allows you to borrow money using your home equity as collateral. The bank gives you a lump sum of money upfront that you’ll repay over a few years in equal installments.
This could be a cheaper way to borrow cash compared to a reverse mortgage, a credit card, or a personal loan. Plus, you keep the home in the process.
| Pros | Cons |
|---|---|
| There are no age restrictions | The monthly payments could strain your retirement funds |
| You get to keep your home as long as you make payments | The lender can foreclose on your property if you can’t pay the loan back |
Check out: Should You Get a Home Equity Loan for Debt Consolidation?
5. Consider a HELOC
Best for: Borrowing money only when you need it
A home equity line of credit is another type of second mortgage, but you receive the funds in a different way. You get access to a line of credit that you can borrow from anytime during the draw period, only paying interest on what you borrow.
Once the draw period ends, you have several years to repay any balance that remains. This could be a good safety net if you lack emergency savings.
| Pros | Cons |
|---|---|
| Only pay interest on what you borrow | The lender can foreclose on your property if you can’t pay the loan back |
| Typically has a lower interest rate than other types of loans, like home equity loans | If home values decline, you could pay back more than the home is worth |
Check out: Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose
