Refinancing is better for people who want to lower monthly payments, while reverse mortgages give cash flow to seniors who want to stay home.
While people often lump a reverse mortgage and refinancing together, these financial products are meant for two separate types of people. A reverse mortgage is for seniors who need access to cash without monthly payments, whereas a mortgage refinance is for those who want to lower their monthly payments or their interest rate.
In this guide, we’ll explore the reverse mortgage vs. refinance debate, breaking down the pros and cons of each, explaining how to decide between the two and providing some tips for people who choose to pursue one.
- What Is Refinancing
- Pros
- Cons
- See All 13 Items
What Is Refinancing
Refinancing, known as a refi or mortgage refinancing, allows homeowners to replace a current mortgage with a new one, ideally with a lower interest rate that lowers monthly mortgage payments. The second mortgage will be for more than you owe and will pay off your original home loan. You’ll then make monthly payments on the new loan.
There are many types of refinancing, with the simplest one being a rate-and-term refinance, where you simply change the interest rate, loan term or both. A cash-out refinance provides the homeowner with cash equal to the difference between the two mortgages, which can be used for paying off high-interest debt or renovations to increase your home’s value.
Refinancing a home mortgage involves some closing costs, which usually amount to 2-6% of the total loan amount.
Pros
- Can lower monthly mortgage payments
- May help reduce your interest rate
- Allows homeowners to tap into their equity
- Only one home loan payment
Cons
- Comes with expensive closing costs
- There’s no guarantee that you’ll qualify for a refinancing
- May push back your loan term
Who Should Consider Refinancing?
It’s worth refinancing if you can reduce interest rates by 1% to 2% or more. With that said, longtime mortgage lender Jason Lerner says homeowners close to paying off their home loan might be better off continuing their original payments since a mortgage refinance typically results in an extended loan term.
Refinancing can also make sense if you want to tap into the equity in your home with a cash-out refinancing. This can be used to fund renovations that can increase your home’s overall value, increase equity or pay off high-interest debt.
What is a Reverse Mortgage?
A reverse mortgage is a loan type that provides seniors with a monthly payment or lump sum in exchange for the equity in their house. No payment is required until the homeowner leaves the property or dies. In the latter case, the loan must be repaid by the estate or the homeowner’s surviving descendants.
Homeowners must be 62 or older to qualify for a home equity conversion mortgage (HECM). A HECM is backed by the Federal Housing Administration (FHA) and is the most common type of reverse mortgage loan. According to the U.S. Department of Housing and Urban Development (HUD), the HECM loan is the only reverse mortgage insured by the federal government. Additionally, the income is not taxable and does not have to be reported to the IRS.
Most reverse mortgage loans are for people 62 and up, though some can be used by people 55. Those loan types, however, are not insured by the federal government.
Pros
- No monthly payments
- Allows you to stay in your house
- Provides homeowners with access to cash
- Don’t have to pay taxes on income
Cons
- Comes with high fees
- May disqualify you from certain benefits, such as Medicaid or Social Security
- Could cause complications for surviving family members
Who Should Consider a Reverse Mortgage?
A reverse mortgage makes sense for older people struggling with monthly cash flow who don’t want to leave a primary residence where they’ve built equity. Reverse mortgages yield steady income that can be put towards living expenses such as groceries and utilities.
Refinance vs Reverse Mortgage
| Mortgage Refinance | Reverse Mortgage | |
| Who’s it for? | People trying to lower mortgage interest rates or monthly payments | Seniors 62 and up who need access to cash |
| Average rate | 6.38-6.71% | 7.56-7.93% |
| Secured? | Yes | Yes |
| General eligibility criteria | At least 20% equity, debt-to-income ratio of 50% or lower | Must be 62 years or older, own your home outright or have minimal mortgage payments |
| Fees | 2-6% of the total loan amount due at closing | Loan origination fee (capped at $6,000), initial mortgage insurance premium, service fees that may be added to the loan |
How to Choose Between Refinancing and a Reverse Mortgage
Real estate expert Ryan Fitzgerald, owner of Raleigh Realty in North Carolina, says the decision between refinancing and a reverse mortgage ultimately comes down to a homeowner’s long-term financial goals.
“For someone with stable income who wants to lower payments or access more equity, refinancing is usually the better move,” Fitzgerald says. “For someone retired and looking for extra money without taking on another bill, a reverse mortgage might make more sense.”
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his coverage of the New York City economy. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with real estate expert Ryan Fitzgerald, owner of North Carolina-based Raleigh Realty.
Frequently Asked Questions
Which is better, reverse mortgage or refinancing?
It depends. A reverse mortgage is better for seniors looking for cash flow without taking on a new monthly bill. In contrast, refinancing is best for homeowners looking to reduce their interest rate or monthly payment.
Who benefits from a reverse mortgage?
The homeowner who takes out the loan. People who qualify for a reverse mortgage loan receive a lump sum or monthly installments based on the equity they’ve built up in their house.
What is the 95% rule on a reverse mortgage?
The 95% rule on a reverse mortgage states that the loan will be paid off if a homeowner’s living descendants can sell the house for 95% of its appraised value.
Sources
- U.S. Department of Housing and Urban Development, “Home Equity Conversion Mortgages for Seniors,” https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome
- Internal Revenue Service, “Are the proceeds I receive from a reverse mortgage taxable to me?” https://www.irs.gov/faqs/other/for-senior-taxpayers/for-senior-taxpayers
- Ryan Fitzgerald, Raleigh Realty
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.