Deciding between a refinance and a reverse mortgage can feel tricky. A refinance allows homeowners to receive more favorable loan terms while a reverse mortgage assists older homeowners interested in regular monthly cash flow. Deciding between the two comes down to your eligibility status and personal situation.
What Is Refinancing
Refinancing — known as a refi or mortgage refinancing — allows a homeowner to replace a current mortgage with a new one. This process gives you the chance to get better interest rates or loan terms.
How Does Refinancing Work?
Refinancing is a loan option that allows you to trade an old mortgage with a new one. To refinance, a homeowner speaks with a lender to determine eligibility. If eligible, the new mortgage is used to pay off the old one. Keep in mind that refinancing requires closing costs and fees.
When Does Refinancing Make Sense?
It’s worth refinancing if you can reduce interest rates by 1% to 2% or more. Refinancing can also make sense if you want to tap into the equity in your home. Use a mortgage calculator and talk to a few lenders to learn more about available refinancing opportunities.
Eligibility Requirements
Eligibility requirements include a minimum credit score, a recommended debt-to-income ratio and a stipulated amount of home equity. When refinancing, you’ll need at least 20% equity in your home. Exact stipulations vary by a mortgage lender.
Loan Approval
The first step in getting approved for this type of mortgage loan is to find a lender and start the application process. That process requires you to provide lenders with personal and financial information. If eligible, it usually takes a few weeks to receive loan approval.
Monthly Payment and Fees
Mortgage refinance requires a combination of monthly payments and fees. Monthly payments, whatever the loan amount is, depend on the length of your loan term and interest rates. Mortgages with lower interest rates have lower fees. You’ll also pay one-time costs at closing, including appraisal fees and attorney fees. The most common mortgage payment is 5% of your total loan balance in closing costs.
Pros and Cons of Refinancing
Before applying for a refi, be aware of the benefits and drawbacks. Benefits include the ability to achieve lower interest rates and better terms. Refinancing can save homeowners a substantial amount of money if interest rates are lower.
Drawbacks include the possibility of monthly fees and reduced home equity. Many lenders limit the total amount you can withdraw from your home value. Creating a new loan runs the risk of costing an individual more money down the road.
The decision to refinance is a personal choice that should be decided with the help of a loan and a legal professional.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan secured by collateral — in this case, a homeowner’s house. The loan allows a homeowner to borrow money using the equity in a primary residence.
How Does Reverse Mortgage Work?
Reverse mortgages use a homeowner’s primary residence as collateral. The mortgage does not require monthly payments. The loan steadily accrues interest that does not need to be paid back until a homeowner dies or leaves the property. Once a homeowner leaves the property by moving, selling or dying, the loan will need to be repaid by the borrower's estate.
When Does Reverse Mortgage Make Sense?
A reverse mortgage makes sense for older people struggling for monthly cash flow who don’t want to leave a primary residence in which they’ve built equity. Reverse mortgages yield steady income that can be put towards living expenses such as groceries and utilities.
Eligibility Requirements
Reverse mortgages are provided to seniors. The minimum age for reverse mortgage opportunities is 62. The property must be the person’s primary residence and the home must be owned outright. It’s possible to get a reverse mortgage if a primary residence has a low mortgage balance, but most lenders require a minimum amount of equity.
Homeowners must be 62 years of age 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. Before applying for a reverse mortgage, examine the wide selection of home equity loans. Choose a loan that uses the home’s equity in a way that works best for you.
Loan Approval
After selecting a reputable lender, start the application process, which will include eligibility requirements that vary from one lender to the next. On average, it takes about five weeks to receive loan approval.
Monthly Payment and Fees
A reverse mortgage does not have monthly payments. Instead, the loan is expected to be repaid once the borrower sells, moves or dies. The loan has high closing costs and origination fees. A reverse mortgage has higher fees than a home equity line of credit HELOC, which functions similarly to a second mortgage.
Pros and Cons of Reverse Mortgage
A reverse mortgage allows you to access much-needed funds by using the equity within your primary residence. The process results in a steady stream of income with no spending regulations.
However, reverse mortgages are complicated and expose a homeowner to a certain amount of risk, including foreclosure. The loan means that heirs receive less once the loan is repaid. Talk to a reputable reverse mortgage lender to discover more details.
Finding a Winner: Refinance vs. Reverse Mortgage
Refinancing and reverse mortgages provide homeowners with two unique home loan products for extra funds. Refinancing helps homeowners trade an old mortgage with a new one. The process gives homeowners the opportunity to enjoy better rates while saving money. A reverse mortgage allows homeowners to use the equity within a home to obtain cash for additional retirement income. While refinancing and reverse mortgages both allow homeowners to access their equity, the two tools differ in their monthly payments and fees. Compare the two options and talk to a knowledgeable lender to make the best decision for your nest egg.
Frequently Asked Questions
Is a reverse mortgage the same as refinancing?
Reverse mortgages and refinancing are different. For example, a reverse mortgage does not need to be repaid until a homeowner leaves the home. In contrast, refinancing requires borrowers to make set monthly payments.
Can you refinance after a reverse mortgage?
Yes, a homeowner can refinance about one year and six months after a reverse mortgage.
Why refinance a reverse mortgage?
Refinancing a reverse mortgage can offer more favorable terms and rates.