Reverse Mortgage vs. Cash Out Refinance: Which Stands Out?

Reverse mortgages and cash-out refinance are two straightforward ways to access cash from your home equity. A reverse mortgage allows you to receive steady streams of cash without having to make payments to the lender. In contrast, a cash-out refinance lets you replace your old loan with a larger new one and keep the difference in cash.

But, how do you choose which works best for you? I’ll break it down for you in today’s article to help you decide!

Understanding Reverse Mortgage and Cash Out Refinance

Let’s go over a quick summary of what a reverse mortgage and a cash out refinance is all about.

Reverse Mortgage -

• What’s unique about reverse mortgages is that they allow homeowners to tap into their equity and receive funds on a monthly basis, as a lump sum, or through a line of credit without having to make payments to the lender like traditional mortgages.
• They’re available for senior homeowners aged 62 and older and if you go for a jumbo reverse mortgage, you can apply even after your 55th birthday. Another main requirement is that you need to have a minimum of 50% equity available to qualify for better reverse mortgage terms and rates.

Cash Out Refinance -

• Getting a cash out refinance allows homeowners to change the terms of their existing mortgage, including interest rates, the mortgage term, repayment schedule and so on.
• If you’re opting for a cash out refinance, you will be switching to a mortgage for more than you currently owe, where the excess amount is paid out to you as cash. This can later be used however you want, such as to meet emergency expenses, upgrade your home interiors, or consolidate your debts.

Reverse Mortgage Vs Cash Out Refinance: 3 Key Features

Alright, both these options allow you to access the equity you’ve built in your home, but they work completely differently, so let me break it down and highlight how each of these options works for your situation.

• Purpose of the Mortgage

  Reverse Mortgages are specifically designed to provide retirees and older people with additional income without requiring monthly payments. A cash out refinance, on the other hand, is often used for immediate financial needs such as home renovations, debt consolidation, or major purchases and everyone is eligible regardless of their age.

• Repayment Terms

  With a reverse mortgage, repayment typically occurs when the home is sold, either by the borrower or their heirs or when the homeowner moves out voluntarily. A cash out refinance, however, requires monthly payments like a traditional mortgage, but with a higher principal balance due to the excess cash withdrawn.

• Mortgage Interest Rates

  Reverse Mortgages often have higher interest rates compared to traditional mortgages or a cash out refinance. This is because they involve a longer loan term and typically do not require immediate repayment of principal or interest. So, if you have an immediate need for funds, you can start looking for the best cash out refinance lenders.

Choosing Between Reverse Mortgage and Cash-Out Refinance

Making a choice is not as complicated as you think. Asking yourself a set of questions can help you decide which of these two works best. I’ll help you with that right away.

➙ What Do You Need The Funds For

• Immediate Expenses

  If you have immediate financial needs such as home renovations, medical bills, or debt consolidation, a lump sum of cash from a cash-out refinance might be beneficial.

  This option allows you to refinance your mortgage for an amount greater than what you currently owe, with the excess funds given to you as cash. This can provide the cash needed to address pressing financial obligations upfront.

• Supplementing Income

  Alternatively, if you're a senior citizen looking to supplement your income without taking on additional monthly payments, it’s a good idea to start researching the best reverse mortgage lenders, as it could be more suitable for you.

  With a reverse mortgage, you can receive funds in various ways (lump sum, monthly payments, line of credit) based on your preference, without the obligation to make monthly mortgage payments. This can be advantageous for retirees.

• Buying a New Home

  This is especially helpful for seniors who are planning to downsize or move to a new city in the near future. There’s no need to get a new mortgage from scratch! You can utilize your existing home’s equity, get a HECM for purchase, and then use those funds to buy your new home.

➙ How Much Equity Do You Have?

• Evaluate Home Equity

  Understanding your home equity involves calculating how much of your home you own after subtracting your mortgage balance.

  Reverse mortgages often allow access to a higher percentage of home equity compared to cash-out refinances. However, the processing time for reverse mortgage applications varies.

  While some are approved faster than cash-out refinances, it depends on factors like initial inquiry, counseling, and appraisal to check your home’s value.

  Once you understand your equity, you might explore options within a reverse mortgage, such as a reverse mortgage line of credit or even a HECM reverse mortgage for purchase, allowing you to withdraw funds as needed and access more funds to buy a new primary residence or use for other needs.

➙ What Are Your Long-Term Plans?

• Staying in Your Home

  Consider how long you intend to remain in your current residence. If you plan to stay for the long term and want to avoid monthly mortgage payments, a reverse mortgage could align well with your goals, allowing you to receive funds as long as you live in your home.

  You might wonder, "How long does a reverse mortgage last?" or if it has a particular term like a traditional mortgage. Essentially, it lasts as long as you reside in your home.

  Another benefit is that this option lets you access funds without the burden of immediate repayment, which can be appealing for retirees or individuals who wish to age in place and are looking for a lasting mortgage solution.

• Monthly Mortgage Expenses

  On the other hand, if you foresee moving in the near future or aim to reduce your monthly mortgage expenses, a cash-out refinance might be more advantageous.

  By choosing the best cash out refinance, you may secure a lower interest rate, adjust your mortgage terms, or consolidate debts, potentially lowering your overall financial obligations.

Reverse Mortgage Vs Cash Out Refinance: Eligibility Requirements

Lastly, let’s discuss the eligibility criteria for each option to check if you qualify!

Reverse Mortgage

• Must be 62 years or older
• Attend a HUD counseling session
• Maintain the property, pay property taxes and insurance
• Enough equity in the home (typically at least 50%)
• Property must be a single-family home, up to a four-unit property (occupying one unit), or a HUD-approved condominium or manufactured home

Cash Out Refinance

• Maintain at least 20% equity in your home
• Complete an appraisal to verify your home’s value
• Minimum credit score of at least 620
• Debt-to-income ratio should be 43% or less
• Loan-to-value ratio should be 80% or less
• Verify your income and employment

It's Now Time to Pick Your Mortgage!

Reverse mortgages and cash-out refinance are both fantastic tools to access your home's value. Now that you understand they serve different purposes, it’s crucial to choose based on the factors discussed above. Asking yourself these questions will lead you to the right decision.

If you're still unsure, and in my opinion, consulting with an expert is essential – it's wise to speak with a licensed best cash out refinance loan officer first. They'll review your financial history in detail and recommend the best option for tapping into your home equity. Let's arrange that complimentary consultation with a loan officer for you.