Reverse mortgage loans may be an attractive option for homeowners, but for some, the
cons of reverse mortgage loans may outweigh the pros. Thankfully, there are plenty of other financial options available. Explore these nine top alternatives to reverse mortgages to discover which option is right for you.
Annuity
What is an annuity? An annuity is a financial contract or investment that provides a guaranteed stream of income to you, similar to a regular paycheck. Often used for retirement,
common types of annuities include fixed annuities, variable annuities, and immediate annuities.
How Do Annuities Work?
Once you find an annuity rate that aligns with your financial goals, you'll either give a lump sum of money or contribute regular payments to your chosen insurance company. That money that you set aside will grow over time. Then, when you enter the distribution phase of the annuity, you'll receive regular payments (either monthly, quarterly, semiannual, or annual) over a set period of time.
Annuity vs Reverse Mortgage
The biggest difference between an annuity and a reverse mortgage is that an annuity is insurance and a reverse mortgage is a loan. An annuity involves investing money with an insurance company, whereas a reverse mortgage allows you to access funds more quickly by tapping into your home equity.
|
Annuity |
Reverse Mortgage |
| Requirements |
You must be at least 18 years of age and have adequate funds to invest in an annuity. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
You'll receive regular payments. Some annuities allow you to cash out and receive a lump sum. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
You can make a single lump sum payment or a series of payments to the insurance company. |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is typically repaid by selling the home when you move out or pass away. |
Annuity Pros and Cons
| Pros |
Cons |
| Financial Security: You'll have a consistent and guaranteed stream of income to help cover expenses like retirement. |
Limited Access to Equity: Because you have to invest in an annuity, it's more difficult to access the principal as a lump sum without receiving penalties. |
| Tax Benefits: The growth of the investment is tax-deferred, which can be beneficial for long-term investors. |
Economic Fluctuation: A fixed annuity may not cover fluctuations in cost of living or inflation, which can reduce the purchasing power of the income you receive over time. |
| No Risk to Property: You don't need to put your home up as collateral for an annuity. |
Additional Fees: Annuities can have additional costs, including investment management and commission fees, mortality and expense risk charges, and penalties for early withdrawals. |
Cash-Out Refinance
A cash-out refinance is a popular and
low-stress way to refinance your home. The process involves replacing an existing mortgage with a new one that's larger than your current one, so you can take the difference or "cash out" a portion of your home's equity into a lump sum.
How Does a Cash-Out Refinance Work?
A cash-out refinance starts with an appraisal of your property to determine its current market value. Then, you'll submit an application for a new mortgage loan, specifying the amount you want to borrow in excess of the current balance. After
your cash-out refinance loan is approved, a new mortgage will be issued that will include the original balance in addition to the amount you want to borrow. Once you pay off the existing mortgage with the profits, you can use the leftover cash to fund expenses, consolidate debt, start home improvements, and more.
Cash-Out Refinance vs Reverse Mortgage
With both cash-out refinance and reverse mortgages, you're taking out a loan that uses equity in your home to your advantage. The major difference between the two home lending options is that a cash-out refinancing loan requires monthly payments while a reverse mortgage does not.
|
Cash-Out Refinance |
Reverse Mortgage |
| Requirements |
You typically must have more than 20% equity in your home, a good credit score, and a stable stream of income. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
You'll receive a lump sum after you're issued the new mortgage. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
You'll make monthly payments as you would with a typical mortgage loan. |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is typically repaid by selling the home when you move out or pass away. |
Cash-Out Refinance Pros and Cons
| Pros |
Cons |
| Lower Interest Rates: Mortgage interest rates tend to trend lower than other forms of borrowing. |
Limited Funds: The maximum amount of cash you can receive is limited to approximately 80% of your home. |
| Access to Cash: A cash-out refinance allows you to tap into the equity in your home for a variety of purposes, such as home improvements, debt consolidation, or educational expenses. |
Increased Debt: A cash-out refinance could lead to an overall increase in mortgage debt and higher monthly mortgage payments depending on market conditions. |
| Potential Tax Deductions: The interest on your cash-out refinance may be eligible for tax deductions. |
Additional Fees: Closing costs will take a chunk out of the money you will be able to put towards your expenses. |
| Flexible Terms: You can choose a cash-out refinance with terms that meet your needs, such as a longer repayment term or a fixed or variable interest rate. |
Foreclosure Risk: If you fail to meet your mortgage payments, you could end up in foreclosure, putting your property at risk. |
Home Equity Line of Credit
A home equity line of credit (HELOC) is a type of revolving line of credit that uses your home as collateral. It offers flexibility and operates somewhat like a credit card, with a pre-approved credit limit and your home functioning as the credit line.
How Do Home Equity Lines of Credit Work?
Getting started on a HELOC is simple. You can apply through a lender who will evaluate the value of your home, the amount of equity you have, and your financial standing. Once approved, you'll be given a credit limit based on the available equity in your home.
Curious about the amount of equity you could access in your home? Check out Unison’s
equity calculator.
You can access funds at any time for any amount (up to your credit limit). After you've used up the funds, you'll enter the repayment stage of the
HELOC process, where you must pay off the principal and accrued interest, typically with monthly installments.
HELOC vs Reverse Mortgage
A major difference between a HELOC and a reverse mortgage is that a home equity line of credit requires monthly payments and a reverse mortgage does not. HELOCs are a good idea if you need access to cash on an as-needed basis and you are comfortable with a variable interest rate, while a reverse mortgage is a better option if you are a homeowner over the age of 62 who needs access to cash but does not want to make monthly mortgage payments.
|
HELOC |
Reverse Mortgage |
| Requirements |
You must be at least 18 years of age, have good credit and a stable source of income, and usually own more than 15% to 20% equity in your home. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
You can access funds at any time via electronic transfer, credit or debit cards, or checks (up to the credit limit). |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
You'll begin monthly payments on the principal and interest after the line of credit is exhausted (after the draw period). |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is typically repaid by selling the home when you move out or pass away. |
HELOC Pros and Cons
| Pros |
Cons |
|
Flexibility: You're offered quite a bit of flexibility in how you can use your funds and when you can access the cash. |
Temptation to Overspend: HELOCs can make it easy to overspend, especially if you are not disciplined with your finances. |
|
Lower Interest Rates: Compared to other forms of borrowing, HELOC interest rates tend to be lower. |
Variable Interest Rates: Over the duration of a HELOC, there is a chance that interest rates could change, leading to a risk of higher monthly payments. |
|
No Closing Costs: Most HELOCs do not have closing costs. |
Risk of Foreclosure: Because your home serves as collateral, failing to keep up with required payments could lead to losing your property through foreclosure. |
|
Tax Benefits: The interest paid on a HELOC may be tax-deductible depending on the use of the funds. |
Potential Negative Equity: If your home value decreases, you could end up owing more on your HELOC than your home is worth. |
Home Equity Loan
Home equity loans, commonly referred to as second mortgages, are a type of loan that allows homeowners to borrow against the equity they have built in their property.
How Do Home Equity Loans Work?
To begin the home equity loan process, you'll submit an application through a lender and wait for approval. Your lender will assess your credit and the amount of equity you have in your home. Upon approval, a lump sum will be sent to you based on the assessment. Repayment starts immediately with monthly installments over the course of the agreed-upon term, including interest on the outstanding balance.
Home Equity Loan vs Reverse Mortgage
There are many home equity loan advantages, but one of the most notable is that you don't have to be of a certain age to acquire a home equity loan. This makes it possible for you to have access to your home's equity earlier than you would with a reverse mortgage. However, keep in mind that a home equity loan requires you to start making payments immediately, unlike reverse mortgages, where you don't take on any monthly payments.
|
Home Equity Loan |
Reverse Mortgage |
| Requirements |
You typically must own at least 15% to 20% equity in your home, have proof of a reliable income, a low debt-to-income ratio, and a good credit score. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
Once you accept the loan offer, you'll receive a single lump sum payment. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
You'll repay the loan by making monthly payments with a fixed interest rate and payments starting immediately. |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is typically repaid by selling the home when you move out or pass away. |
Home Equity Loan Pros and Cons
| Pros |
Cons |
| No Age Requirement: There is no age requirement to obtain this loan. |
Qualifying Requirements: Home equity loans typically have stricter qualifying requirements than other types of loans. |
| Quick Access to Funds: You'll receive a one-time lump sum that you can immediately put towards major expenses. |
Risk of Foreclosure: If you fail to meet your mortgage payments, you could end up in foreclosure, putting you at risk of losing your property. |
| Predictable Payments: With a fixed interest rate, you can budget for your monthly payments and know how much you will owe each month. |
Second Monthly Payment: A home equity loan will create a second monthly mortgage payment, which can increase your financial burden and make it more difficult to budget. |
| Lower, Fixed Interest Rate: Compared to other types of unsecured loans, home equity loans interest rates are typically lower. Plus, your interest rate will remain unaffected by fluctuations in the market. |
Reduced Home Equity: A substantial drop in the real estate market could negatively affect the value of your home, making it possible for you to have a loan balance that exceeds the value of your property. |
Home Sale
Borrowing against home equity isn't the only way for homeowners to access funds. Selling your home is a great alternative to a reverse mortgage loan, too. Not only is there is no accumulation of interest or monthly payments, but downsizing opens up the possibility of paying off your mortgage with a lump sum from profits. Homeowners can also choose to enter into a home sale leaseback, which involves selling your house and then immediately leasing it back using the cash from the sale.
How Does Selling Your Home Work?
If you pursue a home sale leaseback, you'll first find a buyer and then begin the standard home-selling process. Once the conditions of the sale have been defined, you'll transfer ownership to the buyer, and the buyer will provide a lease agreement for your signature. You'll continue living in your home as a tenant or lease the property while living elsewhere, paying rent to the buyer-turned-owner rather than paying your usual mortgage payment.
Similarly, downsizing allows homeowners to access equity based on the difference between the sale price of your current home and the purchase price of a smaller home. This lump sum can be put toward a variety of financial needs.
Selling Your Home vs Reverse Mortgage
The biggest upside to selling your home in favor of either downsizing or entering a home sale leaseback is not taking on any additional interest or debt. With this option, you receive a large sum of cash upfront and have to worry less about monthly fees like property taxes, homeowners insurance, and homeowners association dues. Selling your home may also be a better option if you're not sure how long you will stay in your home since reverse mortgages are long-term commitments.
|
Home Sale |
Reverse Mortgage |
| Requirements |
You must own your home outright or have a significant amount of equity and a clear title with no liens or judgements against it. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
You will receive a lump sum payment after paying off outstanding debts against the home and any real estate commission fees associated with the sale. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
If you have a mortgage on your home, you will need to repay the mortgage in full before you can sell your home. Once the mortgage is repaid, you will be free to keep the remaining proceeds from the sale. |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is repaid, typically by selling the home, when you move out of the home or pass away. |
Home Sale Pros and Cons
| Pros |
Cons |
| Quick Access to Funds: Unlike the long process of getting a reverse mortgage loan, you could potentially close on a deal in just a few weeks, giving you quicker access to money. |
Loss of Ownership: Once the sale is complete, you will no longer be the owner of your home, and you won't be able to benefit from any appreciation in value of the property in the future. |
| No Interest Accrual: As opposed to a reverse mortgage, a home sale leaseback doesn't involve any added interest costs. |
Lease Limitations: Should you choose the home sale leaseback route, there may be stipulations applied to your rental contract limiting your living options and affecting your housing stability. |
| Lower Bills: With the sale of your home, you'll likely experience lower expenses in terms of insurance, mortgage payments, property taxes, and maintenance costs. |
Additional Costs: The cost of selling your home can eat away at the funds you ultimately receive. |
House Hacking
The house hacking strategy is similar to the home sale leaseback concept. However, in this approach, you don't sell your home. Instead, you leverage it to generate income.
How Does House Hacking Work?
House hacking works by renting out a portion of your home to tenants. Typically, multi-family homes or multi-unit properties are used, but even a single-family home can work as long as you have separate living spaces for you and your tenants. This method positions you as both a tenant and an active landlord, which can help you make more money to pay off housing costs and other financial demands.
House Hacking vs Reverse Mortgage
With both house hacking and reverse mortgages, you still maintain ownership of your property and benefit from potential home appreciation. Unlike a reverse mortgage, however, homeowners using house hacking are actively generating additional income by renting out their space rather than receiving a lump sum payment.
|
House Hacking |
Reverse Mortgage |
| Requirements |
Since you already own the home you plan to rent out, the only additional thing you need is a living space suitable for tenants. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
You will receive rental income from your tenants that you can then use to offset your mortgage payments, property taxes, homeowners insurance, and other associated costs. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
There are no repayment terms associated with house hacking. You are simply responsible for all fees associated with your home. |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is repaid, typically by selling the home, when you move out of the home or pass away. |
House Hacking Pros and Cons
| Pros |
Cons |
|
Additional Income: Contrary to loans, you will be generating income from your tenants instead of receiving a lump sum or monthly payments from a lender.. |
New Responsibilities: Becoming a landlord means you'll have to handle additional responsibilities, like maintenance and tenant relations. |
|
Property Appreciation: Because you're retaining ownership of the property, you'll also be able to reap the benefits of a possible future increase in value of the property. |
Potential Tenant Issues: With others living in the same space as you, there may be times when your privacy is affected or damage to your home occurs. |
|
Build Home Equity: Payments you receive from your tenants can be put towards your mortgage, which will increase the equity you have in your home. |
Legal Restrictions: There may be legal restrictions on house hacking in your state. Be sure to familiarize yourself with the laws and regulations before getting started. |
Personal Loan
Personal loans are lump sums of money you borrow and pay back over time. They are designed to immediately assist with a variety of financial needs.
- One of the most common personal loan options, an unsecured personal loan doesn't require any collateral, though you may be required to provide your credit history or have a co-signer to back the loan.
- A secured personal loan, on the other hand, requires an asset to guarantee the loan, such as a vehicle or certificate of deposit.
How Do Personal Loans Work?
Unlike a reverse mortgage, personal loans don't typically require collateral, such as your home. Rather, these loans are lump sums of money given based on your credit history and other financial factors. You must repay the loan amount in regular installments, including an agreed upon interest rate.
Personal Loan vs Reverse Mortgage
If you need a smaller amount of cash quickly, personal loans are the better solution compared to reverse mortgages that typically have a minimum loan amount and a process that can take several weeks to complete. Reverse mortgages also have an upfront mortgage insurance premiums and closing costs, so these alternative to a reverse mortgage can help you avoid fees. Plus, you retain your home equity with a personal loan.
|
Personal Loan |
Reverse Mortgage |
| Requirements |
You must be employed with a steady income, have a good credit score, and a low debt-to-income ratio, typically 36% or lower. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
The lump sum funds can be deposited into your bank account or sent to a third party, such as a creditor or merchant. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
You will typically make fixed monthly payments over the life of the loan, which can range from 12 to 60 months. |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is repaid, typically by selling the home, when you move out of the home or pass away. |
Personal Loan Pros and Cons
| Pros |
Cons |
| Quick Access to Funds: Personal loans give you quick access to cash which can be put towards urgent expenses. |
High Interest Rates: Interest rates for personal loans have the potential to be higher than other forms of borrowing. |
| No Risk to Property: Unlike a reverse mortgage or home equity, your home is not involved or used as collateral.
|
Risk of Default: If you default on a personal loan, you could damage your credit score and even lose your home or other assets. |
| Flexibility: Personal loans can be used for a variety of purposes, such as consolidating debt, paying for unexpected expenses, or financing home improvements. |
Fees: Some lenders may charge origination fees, prepayment penalties, and other fees. Be sure to ask about all fees before you apply for a loan. |
| Easier Qualification: Unsecured personal loans are typically easier to qualify for than other types of loans, such as mortgages and auto loans. |
Credit Requirements: To qualify for the loan you want, you must have a strong credit record, otherwise you could end up with higher interest rates or difficulty securing a loan. |
Sell Other Assets
If you're looking for a solution that achieves the same goal as a reverse mortgage, you may want to consider selling other assets. This involves selecting possessions you want to sell, such as electronics, cars, jewelry, and more.
How Does Selling Other Assets Work?
Selling assets can generate profits to cover various expenses, like home improvements, paying bills, and more. You'll set a price, find a buyer, negotiate, and transfer the ownership over.
Selling Other Assets vs Reverse Mortgage
You should sell other assets instead of a reverse mortgage if you need to access cash quickly and it doesn't put you at risk of losing a significant amount of income or value. Reverse mortgages can take several weeks to process, charge closing costs and fess, and use your home as collateral for the loan.
|
Sell Other Assets |
Reverse Mortgage |
| Requirements |
You must own the asset outright and have the legal authority to sell it. Sometimes you will need to present the title or deed or open a brokerage account and transfer the asset to the account before you can sell it. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
The proceeds from the sale are typically distributed to the seller within a few business days, but the process will vary depending on the asset and the buyer. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
If you sell an asset that is subject to a loan, you will need to use the proceeds to repay the loan balance, but any leftover proceeds will be yours to keep. |
You are not required to make any monthly payments throughout the duration of the loan. Instead, the loan is repaid, typically by selling the home, when you move out of the home or pass away. |
Selling Other Assets Pros and Cons
| Pros |
Cons |
| Quick Access to Funds: You have access to the profits of the sale immediately. |
Limited Funds: Selling an asset provides a one-time lump sum of money, which may not provide as much stability as other options. |
| No Risk to Property: Unlike a reverse mortgage, your home is not involved or used as collateral. |
Loss of Investments: By selling your assets, you will no longer be able to benefit from future appreciation or income from the investments. |
| No Interest Accrual: Because this isn't a loan, there are no monthly payments or interest to worry about. |
Taxes: Depending on the type of asset you're selling and the amount of money made from the sale, you may have to pay capital gains taxes on the profits. |
Home Equity Sharing Agreement
While there are a variety of options you can use to access your home equity or borrow money, they may not be the right fit for you. The best part of a home equity sharing agreement (HSA)? There's no added debt, interest, or monthly payments.
How Do Home Equity Agreements Work?
With Unison, you can enter an
equity sharing agreement as an alternative way to access equity in your home. A Unison homeowner agreement gives you cash in exchange for the right to participate in home price appreciation. We convert up to 15% of your home's value to cash so you can use it towards your financial goals—from paying off debt to renovating your home and funding your retirement.
Home Equity Sharing Agreement vs Reverse Mortgage
As opposed to a reverse mortgage, homeowners who take out equity sharing agreements don't have to worry about monthly payments or never-ending interest fees. Rather, they agree to share a portion of their home's future change in value, either when the home is sold or the agreement ends. With Unison, for example, the agreement term is 30 years. With no additional fees or age restrictions, you can access your home's equity right away instead of having to wait for retirement!
|
Equity Sharing Agreement |
Reverse Mortgage |
| Requirements |
You'll need to own your home outright and have a certain amount of equity, a good credit score, and a low debt-to-income ratio. |
You must be at least 62 years of age and have a significant amount of equity in your home. |
| Disbursement |
With Unison, you can access up to 15% of your home's appraised value. Once you receive the funds, you're free to use it however you wish. |
You can receive monthly payments, lump sum payments, a line of credit, or a combination of these options. |
| Payment |
A Unison Agreement is not repaid; instead, when it’s time to sell or at the end of the agreement term, they share in the change in your home’s value. Or you can choose to buy them out. In some cases, the property could come down in value such that Unison shares in the downside with the homeowner.
|
You are not required to make any monthly payments throughout the duration of the reverse mortgage. Instead, it is repaid typically by selling the home, when you move out of the home or pass away. |
Equity Sharing Agreement Pros and Cons
| Pros |
Cons |
| Access to Cash: An equity sharing agreement can provide you with access to cash without having to sell your home. This can be helpful if you need money for a major expense, such as home repairs, medical bills, or other costs. |
Refinancing:Some mortgage lenders may decline to provide new loans to you because you have subordinate financing that shares in equity or home appreciation. |
| Flexible Repayment Terms: Home equity agreements offer flexible repayment terms, so you can choose a repayment schedule that works for you. |
Fees: Equity sharing agreements may also have costs associated with them, such as a transaction fee and third-party costs such as appraisal and settlement costs. |
| Retain Home Ownership: With an equity sharing agreement, you retain ownership of your home, so you can continue to live in your home and build equity. |
Not One-Size Fits All:Unison Agreements are unique, just like the homeowners we serve. As such, they are not the right fit for everyone. It’s important to make sure you understand the agreement and how it may impact you. |
Get a free estimate with Unison today to see how much you can tap into your home equity, with no financial obligation or impact to your credit.
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