Reverse mortgage alternatives: 8 options to consider

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

Some older adults use a reverse mortgage to help finance their retirement by converting home equity into accessible cash. While it's true that reverse mortgages can help retirees supplement their income using the home equity they built, they aren't the right fit for everyone. For homeowners who want to hold onto their equity and pass on the home to their heirs, there are other financing options.

If you are exploring ways to unlock the wealth you’ve built you’ve built in your home, knowing your options can help you make the best decisions for your needs, preferences, and situation. Let’s take a look at some alternatives to a reverse mortgage to help you find the right solution for you.

Note that Rocket Mortgage does not offer reverse mortgage loans.

Key takeaways:

• Reverse mortgages allow older homeowners to access equity to get cash without having to make a monthly payment.
• However, reverse mortgages also mean sacrificing that equity and come with high upfront fees, compounding interest, and foreclosure risks.
• Primary alternatives include downsizing, home equity loans, cash-out refinances, home equity investment agreements, and inter-family loans.

What is a reverse mortgage?

A reverse mortgage is a loan for homeowners 62 or older that lets them convert their home equity into cash.

With a reverse mortgage, you can borrow money against the equity built in the home and the title to the home stays in your name. However, you won't make mortgage payments. Instead, the home loan is repaid once the owner no longer lives there – either after they move permanently or they pass away.

A reverse mortgage loan first pays off the existing mortgage balance. Then, the homeowner can use the remaining funds however they choose but is still responsible for paying property taxes and homeowners insurance.

The lender provides cash via a lump sum, monthly installments, or a line of credit, and your loan balance grows larger over time as interest compounds.

Reverse mortgage requirements

Here are some of the requirements for a reverse mortgage:

• You must be 62 or older.
• You must have at least 50% equity in the home.
• The home must be your primary residence.
• You must have enough funds to be able to pay property expenses, like taxes and insurance.
• If you get a home equity conversion mortgage (HECM), which is the government-insured reverse mortgage, you’ll need to attend a counseling session and undergo a financial assessment.

What is a HECM?

The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM). HECMs are insured by the Federal Housing Administration (FHA) and backed by the U.S. Department of Housing and Urban Development (HUD).

Because HECMs are government-insured, all prospective borrowers are legally required to attend a consumer information session with an independent, HUD-approved counselor before finalizing an application. This counseling session ensures you fully understand how compounding interest works, the costs involved, and how the loan impacts your estate.

Pros and cons of a reverse mortgage

Before weighing alternatives, it helps to examine why some homeowners choose reverse mortgages - and why others choose to avoid them.

Pros

Some of the advantages of a reverse mortgage include:

• Supplement your income: A reverse mortgage can help broaden your budget if you’ve stopped working or scaled back.
• No mandatory monthly mortgage payments: You do not make monthly payments toward principal or interest while living in the home.
• Flexible cash distribution: You can receive funds as an upfront lump sum, steady monthly cash flow, a flexible line of credit, or a combination of these options.
• Tax-free proceeds: Funds received from a reverse mortgage are categorized as loan advances rather than income, meaning they are not subject to federal income taxes.
• Eliminate existing forward debt: Incoming loan proceeds must first pay off any remaining balance on your original forward mortgage, eliminating that monthly payment.

Cons

It’s important to also be aware of the drawbacks and risks that come with getting a reverse mortgage:

• High upfront costs: Reverse mortgages carry origination fees, FHA initial mortgage insurance premiums, appraisal fees, and closing costs.
• Compounding interest: Because no monthly payments are made, interest and monthly MIP charges are added to your loan balance each month, eroding your equity at an accelerating pace.
• Foreclosure risks: If you fail to pay your local property taxes or homeowners insurance, or allow the home to fall into disrepair, the lender can declare the loan in default and initiate foreclosure.
• Impact on government benefits: While reverse mortgage proceeds do not impact Social Security or Medicare, cash held in your bank account could affect eligibility for needs-based benefits like Medicaid or Supplemental Security Income (SSI).
• Reduced inheritance: As your loan balance grows, the remaining equity left for your heirs decreases, making it harder to leave the family home to children.

Reverse mortgage scams circulate to target seniors and their home equity. Be sure any reverse mortgage you pursue is with a reputable lender.

When to consider alternatives

If you want to leave your home clear of debt to heirs, plan to move within the next few years, or are uncomfortable with high upfront closing fees, there are some alternatives to a reverse mortgage.

How to compare reverse mortgage alternatives

Here’s a comparison table to help you evaluate which alternative fits your financial picture best.

• Costs and fees: Calculate the total upfront cost required to access cash. While reverse mortgages often roll origination and FHA insurance fees into the loan balance, alternatives like home equity loans or cash-out refinances carry standard closing costs - typically 3% to 6% of the loan amount.
• Monthly payment responsibilities: It’s important to understand your other retirement budget obligations before taking on a reverse mortgage. Reverse mortgages don’t require mortgage payments, though you remain responsible for property taxes and insurance.
• Eligibility requirements: Traditional mortgages require income, manageable debt-to-income (DTI) ratios, and credit score requirements. If you have limited retirement income or lower credit scores, home equity loans or selling and downsizing may be easier to access.
• Foreclosure and repayment risks: Any loan that uses your primary residence as collateral carries foreclosure risk if payments are missed.

8 reverse mortgage alternatives

If you’ve been considering a reverse mortgage to boost income, pay for care, consolidate debt, or make home improvements, but aren’t sure it’s the right move, consider the following alternative options.

1. Sell and downsize your home

Selling your current property and purchasing a smaller, less expensive residence - or moving into a rental community - is one of the most effective ways to unlock equity without taking on new debt. You can also save on property taxes

• How it works: You sell your existing home, pay off any remaining mortgage, and use the net cash proceeds to buy a smaller property clear of debt.
• Best for: Homeowners who want to eliminate monthly mortgage payments entirely, reduce ongoing utility bills, and cut back on home maintenance.
• Requirements: Sufficient home equity to cover real estate sales commissions, moving expenses, and the purchase price of the new home.
• Considerations: Moving requires physical effort and emotional adjustment. However, buying a smaller home can save thousands annually on property taxes and maintenance.

2. Refinance your current mortgage

If you want to lower your monthly payment on your current mortgage, a rate-and-term refinance¹ or cash-out refinance can help.

• How it works: You replace your existing loan with a new primary mortgage with different terms. You can lower your interest rate and monthly payment or pay off your mortgage sooner. In a cash-out refinance, you take out a loan larger than your current balance and receive the difference in cash at closing.
• Best for: Senior homeowners who have reliable income, strong credit, and want to lower their interest rate or access a lump sum while retaining a single primary mortgage.
• Requirements: Typically requires at least 20% equity remaining in the home after the cash withdrawal, a credit score of 620 or higher, and proof of income.

Like a reverse mortgage, a cash-out refinance can give you access to lump sum of money. Unlike a reverse mortgage, a cash-out refinance requires you to still make monthly payments of principal and interest. However, interest rates on primary mortgages are often lower than reverse mortgage rates, interest does not compound against your equity, and you retain full ownership control for your heirs

3. Take out a home equity line of credit (HELOC)

You can also take out a home equity line of credit (HELOC), which is a second mortgage that gives you access to your home equity. Similar to a credit card, a HELOC gives you access to your home equity through a revolving line of credit. Instead of getting a lump sum, you can borrow as needed up to your credit limit, and continue to repay and borrow against it for years.

• How it works: During an initial draw period, you can withdraw cash up to your credit limit as needed, making interest-only monthly payments on the amount borrowed. Once the repayment period begins, you can no longer draw cash and must pay both principal and interest.
• Best for: Homeowners needing flexible, ongoing access to cash for unpredictable costs, such as medical bills or home modifications.
• Requirements: Typically requires 15% to 20% equity, a credit score of 680+, and verifiable income

Keep in mind that he money you borrow with a HELOC must be paid back. If you're unable to keep up with your payments, you risk losing your home. Before taking on a second mortgage, it’s important to confirm that you can keep up with the monthly payments.

Note that Rocket Mortgage does not offer HELOCs at this time.

4. Apply for a home equity loan

Another option is to apply for a home equity loan². A home equity loan is another type of second mortgage that provides a single, lump-sum payout of cash upfront. Unlike a HELOC, you'll get all the funds at once. You'll make fixed monthly payments until the loan is paid back, usually 10 – 15 years.

• How it works: You receive your funds in one payment at closing and repay the debt via fixed monthly payments over a set term, typically 10 to 20 years.
• Best for: Funding distinct, one-time expenses with predictable costs, such as a roof replacement or major medical procedure.
• Requirements: Sufficient home equity (usually leaving 15% to 20% equity left), stable retirement income, and a manageable DTI ratio.

While with a lump-sum reverse mortgage you'll get all the proceeds from a loan in a single, upfront payment, a home equity loan does require monthly payments. Putting your home up as collateral can be risky if you end up falling behind on payments, so you’ll need to make sure you can afford this second mortgage. You can use Rocket Mortgage's home equity calculator to estimate your equity.

Currently, Rocket Mortgage offers Home Equity Loans for primary and secondary homes.

5. Rent your space to others

Another alternative is house hacking, where you generate rental income from your house. For example, renting a room or an entire space for short-term stays or maybe for long-term tenants.

• How it works: You rent out a spare bedroom, a finished basement, or an over-garage apartment to long-term tenants or short-term vacationers.
• Best for: Homeowners who have unused living space and want to supplement their monthly income without borrowing money or adding debt.
• Requirements: Local municipal zoning approval, landlord insurance coverage, and compliance with lease agreements.

If you're thinking of renting part of your home, screening renters, drawing up proper legal agreements, and updating your insurance policy can protect your safety and finances.

6. Consider a home equity investment or home equity sharing agreement

A Home Equity Investment (HEI) or home equity sharing agreement allows you to unlock equity without monthly payments or interest rates.

• How it works: A private investment company provides an upfront lump sum of cash in exchange for a share of your home's future appreciated value.
• Best for: Homeowners who do not qualify for traditional mortgage loans due to credit or income limits and do not want monthly payments.
• Considerations: There are no monthly payments, but you must buy out the investor's share or sell the property at the end of the contract term - typically 10 to 30 years. If your home appreciates significantly, the buyout cost can be substantial.

7. Use a sale-leaseback agreement

You can also consider the option of a leaseback agreement with a family member. With this option, you would sell your home to a family member and can rent it back and remain in the home. This could be a short-term solution while you look for a new, smaller home.

• How it works: You sell your home to an investor or specialized company and immediately sign a lease to remain in the property as a tenant.
• Best for: Seniors who want full cash equity upfront and prefer renting over property ownership burdens.
• Considerations: You give up ownership of the home and become a tenant responsible for paying monthly rent.

8. Add or rent an ADU

Constructing an Accessory Dwelling Unit (ADU) - such as a small backyard cottage or mother-in-law suite - can create rental income or provide housing for a caregiver.

• How it works: You build a secondary housing unit on your lot and rent it out, or move into the ADU yourself and rent out the primary residence.
• Best for: Homeowners with large lots who want to boost cash flow or live close to family.

Steps to take before committing to a reverse mortgage alternative

If you're considering a reverse mortgage to increase income, pay for care, consolidate debt or make home improvements, there are other ways to reach these goals.

Determine your home equity

Before taking out a new loan or refinancing, it's important to get understand how much home equity you have so you know how much you'll be able to borrow.

To calculate your home equity, subtract your current mortgage balance from your home's current estimated market value. For example, if your home is valued at $500,000 and you owe $350,000, you have $150,000 in equity. So your home equity is 30%.

Shop for the best rates

It’s a good idea to compare rates and terms from at least several different lenders to make sure you’re getting the best deal. Lenders may offer different types of loans, have varying qualification requirements, and charge different fees.

When you get quotes from several lenders, be sure to get quotes for the same amounts, then compare them side by side. Look closely at the interest rates, repayment terms, and other fees and costs.

Consult with a qualified professional

Talking to a qualified real estate attorney, tax specialist or financial advisor before you apply for a new loan or financing can help you understand how a loan fits with your financial goals. A seasoned, reputable professional can break down complex financial details and spot financial scams.

The bottom line: Compare all available options

A reverse mortgage is just one of many financial options for senior homeowners looking to tap into their home equity. You can also choose to downsize, secure a standalone Home Equity Loan, do a cash-out refinance, or enter into a home equity sharing agreement, depending on your needs, priorities, and goals.

If you're curious about refinancing your options, you can start an application today.

² Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.

How to compare reverse mortgage alternatives

Here’s a comparison table to help you evaluate which alternative fits your financial picture best.