Reverse mortgage alternatives: everything you need to know

More homeowners are turning to reverse mortgages to access their home equity in retirement. If you’re considering one for your retirement plan, it’s probably for one of the following reasons:

No monthly mortgage payments: When you borrow with a reverse mortgage, you don’t have to make any payments toward the balance until the mortgage is due.

Don’t pay until you leave: A reverse mortgage is only paid back when the last remaining owner passes away, moves, or sells the home.

Stay in the home you love: Similar to other home equity loans, a reverse mortgage allows you to access your home’s value without selling the property.

Reverse mortgage loans are a broad category of borrowing products aimed at senior homeowners. Of all the types of reverse mortgages, the most common is the home equity conversion mortgage (HECM), a loan insured by the U.S. Department of Housing and Urban Development (HUD). Non-HECM reverse mortgages and jumbo reverse mortgages are offered by non-profits and private lenders, but may have more restrictive terms and may not include the same protections.

Other types of reverse mortgages include the single-purpose reverse mortgage and the proprietary reverse mortgage.

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What alternatives are out there?

While there is no perfect substitution for a reverse mortgage, there are many alternatives that may better suit your personal finance needs. If you’re looking to unlock home equity to supplement retirement income, cover living expenses, consolidate debt, or pay for home improvements, here are your options:

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Fraction Mortgage ← closest match

Fraction launched in 2020 as an innovative digital platform that enables homeowners to manage and diversify their home equity in a way that was not previously possible. Fraction's mission is to empower homeowners with socially conscious financial solutions they need to live and age well.

While the Fraction Mortgage is technically a first-lien HELOC, it remains the closest alternative that homeowners have to a reverse mortgage.

Advantages: No required monthly payments*, no age restrictions, no prepayment penalties.

Key differences: Must be paid or refinanced after 5 years.

Compare Fraction to a reverse mortgage →

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Other alternatives

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Traditional HELOC

A home equity line of credit (HELOC) is a form of revolving credit, like a credit card, secured against your home. You can use money from the line of credit as you would with any funds, and pay back the balance in monthly installments, as you would with a credit card. Compared to reverse mortgages, you can generally access a larger portion of your equity.

Advantages: No age restrictions, higher borrowing amounts, no prepayment penalties, lower interest rate, and closing costs.

Key difference: Monthly payments.

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Home equity loan

A home equity loan is a second mortgage typically provided in a lump sum that is paid back on a monthly schedule, offered at a variable or fixed rate. If you are simply looking for a way to access your equity, and you have the income to cover payments, this may be a better alternative. If you haven’t built up significant equity yet, this may be an option as well.

Advantages: No age restrictions, borrow at a higher LTV, no prepayment penalties,

Key difference: Fixed monthly payments.

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Cash-out refinance

If your home has appreciated significantly, a cash-out refinance would allow you to roll the excess value of your home into a new mortgage, and in turn, allow you to access some in the form of cash. However, refinancing your existing mortgage would mean taking on new, and potentially higher, mortgage payments.

Advantages: No age restrictions, higher borrowing amounts, no prepayment penalties.

Key difference: Monthly payments.

Home equity investments

A home equity investment (HEI) is a method to gain access to your home equity by co-investing or home equity sharing. Companies such as Point, Unison, Hometap, and Unlock can purchase up to $550,000 in equity from homeowners. Once accepted, these companies provide homeowners with a one-time payment in exchange for a portion of the future appreciation of their homes.

Advantages: No age restrictions, higher loan amounts

Key difference: Not a loan, higher fees

Learn more about home equity investments →

How to pick the right alternative

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If you don’t have enough equity

If you own less than 50% of your equity (learn how to calculate equity here), then it is unlikely that you will qualify for a reverse mortgage. However, many HELOC and home equity loan lenders will gladly let you borrow up to 85% LTV (translation: you can borrow anything over 15% of your equity). Keep in mind, you will have to make monthly payments on these loans if you are holding a loan balance.

If you want a “payment-free” style mortgage, similar to a reverse mortgage, it may be challenging to find a lender with favorable terms. That being said, a mortgage broker may be able to set you up with a private lender who will agree to such loan terms. Granted, this loan will likely come with a higher-than-average mortgage rate. Alternatively, you could explore HEI options out there, which offer as high as 75% LTV.

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If you are under 62

If you are under 62 and want a loan with no required monthly payments — similar to a reverse mortgage — consider a Fraction Mortgage.

Unlike a reverse mortgage, a Fraction Mortgage must be paid or refinanced at the end of a set year term. This is beneficial if you want more flexibility to pay off or refinance your home at a later date. However, this may be disadvantageous if you want to delay any payment or refinance until you leave, as is the case with a reverse mortgage.

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If the lender won’t let you borrow enough

Reverse mortgage lenders may advertise that you can borrow up to 65% of your home equity with a reverse mortgage, but rarely is that limit attainable for most borrowers. The amount you can borrow often referred to as a reverse mortgage initial principle limit is determined by your age, the interest rate, and the value of your property. If you want a reverse mortgage backed by the FHA, you can only borrow up to $970,800. In some markets, that limit is even lower.

If you are dissatisfied with the maximum amount the lender has offered, you may have better luck with a HELOC, home equity loan, or cash-out refinance. While these options may allow you to access more cash, they will come with mandatory monthly payments.

For an alternative with no required monthly payments, the Fraction Mortgage is always an option. Fraction will not limit your borrowing amount based on age or interest rates. However, our maximum LTV may be lower than the amount you desire. Consider getting an estimate to see if you can qualify for more funds.

Learn how to qualify for a larger loan →

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If you want to access equity from an investment property

Unfortunately, you cannot take out a reverse mortgage on an investment property, secondary property, or rental property. Anything real estate that isn’t your primary residence is off the books.

The closest alternative you’ll get to a reverse mortgage on an investment property is a Fraction Mortgage. Fraction allows you to unlock a significant amount of equity portion — enough to buy another property, to cover home repairs, or to finance assisted living — all with no required monthly payments. If your goal is to reduce monthly cash outflows, Fraction should be on your list for consideration.

If avoiding monthly payments isn’t a priority, you’ll be happy to learn that all other reverse mortgage alternatives (HELOC, home equity loan, cash-out) allow you to tap equity on your investment property, albeit with stricter eligibility criteria such as a high credit score.

Apply for a Fraction Mortgage on your investment property →

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If you don’t want to be locked into a long-term contract

A reverse mortgage may be worthwhile over the long term, but if you want to retain more control over how you manage your home equity, you may want to consider alternatives.

A reverse mortgage could turn into a costly mistake if you decide to end the loan early. Early repayment could incur penalties, and other fees could eat into your hard-earned equity, and even convince you to keep the mortgage — even if it is not in your best interest.

For a flexible alternative type of loan with set year terms and no prepayment penalties, consider the Fraction Mortgage. No required monthly payments mean it functions similarly to a reverse mortgage, but you can pay down the balance at any time without incurring additional costs.

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Things to consider before getting a reverse mortgage

Before taking the plunge on a reverse mortgage, consider the qualifying criteria and restrictions:

You need ample home equity: Your home needs to be paid off, or you must own a significant portion of your home equity (at least +50% is often required). Calculate your home equity here →

You must be 62+: You and any co-owners must be over the age of 62 to be included in the reverse mortgage agreement. If a family member or co-owner is left off the agreement, they may be forced to sell or leave if the reverse mortgage holder leaves the property.

Your borrowing amount may be capped: The amount you can borrow with a reverse mortgage will depend on your age, the interest rate, and the value of your home. Typically, older borrowers will be able to access more equity. Learn how to access more equity →

Only available for your primary residence: The home must be your primary residence and remain that way for the duration of the loan. If at any time you leave the property for more than 12 months, the loan may be called. Learn how to borrow equity from investment properties →

There may be pre-payment penalties: A reverse mortgage is a long-term contract. If you wish to leave the reverse mortgage early, you will be required to pay the balance, and you may incur a prepayment penalty.

You could lose your home: Failing to pay property taxes and homeowners insurance over the life of the loan could put you in a precarious financial situation, and risk foreclosure. The reverse mortgage could be called by the lender, forcing you to sell the home.

You may be better off downsizing: It’s important to speak with a financial advisor before pursuing a reverse mortgage. Depending on the value of your home, your investments, and your housing market, you may be significantly better off selling your home and using the proceeds to buy or rent another property.

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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.