One of the greatest benefits of homeownership is equity. You’ve worked hard to pay off your mortgage and build your housing wealth. Now, you can leverage your home’s equity to enjoy your retirement or pay off expenses. There are several ways to borrow against that equity, one of the most popular being refinancing your home. Yet, another option exists for homeowners over the age of 62 — a federally insured reverse mortgage.
Let’s explore how these two options compare if you’re debating between a refinance or reverse mortgage.
Before we dive into which option is right for you, it’s important to understand the basics of what a reverse mortgage entails versus refinancing.
A reverse mortgage is a unique loan and an excellent way to enjoy the equity you’ve invested in your home without having to move out. When you borrow against your home’s equity, you will receive a lump sum, monthly payments or a line of credit to do with what you want. You can pay off debt, travel the world or cover your expenses so that you can enjoy your retirement in peace — all while continuing to enjoy owning your home.
When paying a regular mortgage, your payments cover your loan’s principal and interest. These payments raise your equity, decreasing the balance you owe. Unlike a typical mortgage, where you pay down the owed amount, a reverse mortgage still entails borrowing money, so it increases your interest while using equity.
One of the most popular types of reverse mortgages is a home equity conversion mortgage (HECM).
In the simplest terms, refinancing your home means you take out a new mortgage loan to pay off your existing loan — hopefully with more favorable terms. Many homeowners use refinancing to put themselves in a better financial situation. Sometimes, you can achieve a better interest rate or lower your monthly payments.
One type of refinancing option is called a cash-out refinance. This loan replaces your existing mortgage with new terms while converting your home’s equity into cash. A refi provides a new rate and loan term, which may be longer or shorter, and a new monthly payment. A cash-out refi increases your debt and monthly payment because you borrow your equity — the amount of the original loan you’ve already paid — again for a different rate and term.
For example, if you have a house valued at $400,000 and have a $200,000 loan remaining, you can withdraw $100,000 as a cash-out refi. Then, you will owe $300,000 and have a new repayment rate and period.
A cash-out can also occur if your property value goes up, and you can cash out on a portion, but if the home value drops later on, you could owe more than the home is worth.
| Key Differences Between Reverse Mortgages and Cash-Out Refinancing | Reverse Mortgage | Cash-Out Refinance |
| What You Borrow | You receive an agreed-upon amount of your equity. | You withdraw some of your equity and replace your old loan with a new one. |
| How Your Loan Affects Your Payments | You receive the amount without any required monthly payments. | You receive new loan terms with a new required monthly payment amount and payback period. |
| How Your Loan Affects Your Balance | Your balance raises with added interest each month. | Your new loan will be the amount left on your initial loan and the amount you withdrew, as well as interest. |
| Age Restrictions | You must be at least 62. | There is no age requirement. |
Many older adults consider refinancing or reverse mortgages as a way to add financial stability and extra cash to their budget. Yet, there are benefits and disadvantages to each option.
Some of the most attractive benefits of a reverse mortgage include:
A reverse mortgage is only available to senior citizens, which in the United States means older adults over the age of 62. You must have sufficient equity in your home to cover the loan, and your debt will increase due to interest fees and the amount borrowed.
Refinancing also provides distinct advantages:
A cash-out refi increases your debt and monthly payment. You have to have enough monthly income to pay the monthly required payments, taxes, insurance and upkeep.
Senior Lending Corporation is Florida’s leading reverse mortgage company with years of experience in the industry. We use this expertise to educate homeowners and help older adults find a financial option to secure their retirement.
If you want to live life on your terms, we want to guide you toward financial security and help you achieve your retirement goals. When you speak with one of our licensed advisors, we will offer flexible solutions and honest recommendations.
If you would like to speak with a licensed advisor about the benefits of a HECM from Senior Lending Corporation, contact us or call us today – 800-822-1190. We can discuss your options and help you decide whether a reverse mortgage is the right choice for your financial future.
