Reverse Mortgage vs. Refinancing

by Francine Huff
May 29th, 2009

Are there situations where it makes more sense for a homeowner to refinance their home rather than get a reverse mortgage? That depends upon the borrower’s financial situation and stage of life. Let’s take a look at how these mortgage loans differ.

Converting Home Equity to Cash
A reverse mortgage allows you to cash in on the equity built up in your home over the years. The older you are, the more money you’ll be able to get. You’ll receive the money as a lump sum, regular payments, line of credit, or combination of the above methods. The loan won’t have to be repaid until you leave your home or die.

As you use up the loan, your home equity will decrease while the amount of debt you have will increase. Some people may be uncomfortable with accumulating debt—especially if they’re used to living debt-free—but it’s important to remember that you won’t be responsible for any monthly payments on your home with a reverse mortgage. Also, there’s always the chance that the value of your home will increase, which could help you retain more equity over the life of the loan.

Mortgage Refinancing
Refinancing a mortgage loan has the opposite result. At the beginning of the loan you’ll have a large balance. You may have some equity at the beginning of the loan period if you make a sizable down payment or already have some equity in your home at the time of refinancing. But as you pay it off you’ll increase your home equity and decrease your mortgage debt.

Here are some other ways refinancing differs from getting a reverse home loan:
—Reverse mortgages don’t require income or credit checks, but refinancing typically does.
—With a reverse mortgage you can’t be forced to move unless you stop making tax and insurance payments. So you won’t have to worry about foreclosure.
—Reverse mortgages can only be used on your primary residence.

Refinancing a mortgage means you’ll have to come up with the cash to make regular monthly payments. If you are at least 62 and retired, don’t have a steady income, or just can’t keep up with your monthly payments, a reverse mortgage may make more sense than refinancing. But if you abhor debt and have enough income to pay your living expenses, refinancing could be a good way to lower your mortgage rate.

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