Homeownership opens the doors to many opportunities, including the ability to refinance or take out a reverse mortgage. While refinancing lets you lower your monthly payment and keep the equity in your home, a reverse mortgage pays you every month, in a lump sum, or in the form of a line of credit.
Learn the differences between a refinance and reverse mortgage so you can choose the best option for your unique needs.
What Are the Differences Between a Reverse Mortgage and a Refinance?
|Eligibility||Must be at least 62 years old and either own your home outright, have a low mortgage balance, or have at least 50% equity||Can refinance your home at any time as long as you have at least 20% equity, no matter your age|
|Monthly Payments||No need to make monthly payments||Monthly payments are required|
|Available Cash||Can receive a lump sum of money, monthly payments, or line of credit||Must pursue a cash-out refinance rather than a traditional refinance to receive actual cash|
|Fees||Housing counseling costs, origination fees, closing costs, as well as an initial and annual mortgage premium||Closing costs, usually between 3% and 6% of your outstanding principal|
Reverse mortgages were designed to help seniors nearing retirement. That’s why you must be at least 62 years old to take out a reverse mortgage. It’s also essential that you have substantial equity in your home of at least 50%.
If you’d like to refinance your home, you’ll need a decent credit score. While a standard mortgage refinance requires at least 620, you can get away with 580 or even no minimum score if you pursue refinance through a government program. In most cases, lenders will ask that you have at least 20% of equity in your home.
With a reverse mortgage, you borrow against your home’s equity. The loan proceeds you receive will pay off your current mortgage if you have one. You then can use the remaining money however you’d like. Since the proceeds covered your existing mortgage, you’re no longer responsible for monthly payments.
When you refinance a mortgage, you take out a new loan to pay off your existing loan, often to lock in a lower interest rate or lower your monthly payment with a longer term. You’ll still have to make monthly payments until you pay off your new loan.
While you won’t have to pay monthly payments with a reverse mortgage, you will be responsible for property taxes, insurance, and home maintenance.
While a regular mortgage requires you to make payments to the lender, a reverse mortgage does the opposite. It pays you, the homeowner, typically on a monthly basis, with a lump sum, or through a line of credit. For this reason, a reverse mortgage can be a good way to supplement your retirement income or cover large expenses such as out-of-pocket medical costs.
You won’t get any cash if you pursue a traditional refinance. But if you opt for a cash-out refinance, you’ll be able to replace your current mortgage with a new, larger loan and pocket the difference between the amount you borrow and what you owe on your home.
Since you’ll borrow more money with a cash-out refinance, expect a higher interest rate.
Both a reverse mortgage and refinance will cost you. With a reverse mortgage, you’ll owe origination fees of no more than $6,000. You’ll also be responsible for closing costs, which may cover an appraisal, inspection, title search, credit check, and more.
You’ll also have to pay an initial and annual mortgage insurance premium to the Federal Housing Administration (FHA). There will also be housing counseling costs you’ll be charged to participate in the required counseling before you receive your loan. While closing costs for a refinance vary by lender, expect to pay anywhere between 3% and 6% of your principal balance.
Which Is Right for You?
If you’re 62 or older and looking for a way to pad your retirement savings or pay for a medical bill, home repair, or other important expense and can’t qualify for a refinance, a reverse mortgage might be a good option. This is particularly true if you’ve paid off your home and have significant equity in it.
A refinance, on the other hand, makes more sense if you’re looking for a way to lower your interest rate, pay off your mortgage sooner, or save on the total amount of interest you pay. It may also be worth considering if you’d like to switch from an adjustable-rate mortgage to a fixed-rate mortgage or vice versa.
There are three types of reverse mortgages: a single-purpose reverse mortgage, a proprietary reverse mortgage for private loans, and a federally-insured reverse mortgage, also known as a home equity conversion mortgage, which can be used for any purpose. The latter is the most common.
The Bottom Line
Both a reverse mortgage and refinance can give you the chance to take advantage of the equity in your home. But your stage of life, financial situation, and particular goals will determine the option you should pursue. Before you move forward with a reverse mortgage or refinance, understand the ins and outs of both strategies so you can make an informed decision.
Frequently Asked Questions (FAQs)
Can you refinance a reverse mortgage?
Yes, you may refinance a reverse mortgage into a conventional loan or a different type of mortgage. To do so, you’ll need to meet the eligibility criteria for the new loan, which will likely depend on your age, credit, home equity, and a few other factors.
Do you need to refinance in order to get a reverse mortgage?
No, you are not required to refinance to get a reverse mortgage. You should only consider doing so if your home has appreciated, interest rates have declined, or you want to add your spouse to the loan to provide them with some security.
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Consumer Financial Protection Bureau. “Can Anyone Take Out a Reverse Mortgage Loan?"
National Council on Aging. "A Guide to Reverse Mortgages for Older Adults.”
Fannie Mae. “Selling Guide.”
Department of Housing and Urban Development. “Section A. Borrower Eligibility Requirements,” Page 3.
Department of Veterans Affairs. “VA Guaranteed Loan.”
Transunion. “How Much Equity Do I Need To Refinance?"
Federal Trade Commission. "Reverse Mortgages."
Freddie Mac. “Understanding Your Options for Refinancing."
Consumer Financial Protection Bureau. "How Much Will a Reverse Mortgage Loan Cost?”
The Federal Reserve Board. “A Consumer’s Guide to Mortgage Refinancing.”
American Advisors Group. “How Do I Refinance My Reverse Mortgage?”