Reverse Mortgages vs. Cash-Out Refinancing: Which is Better?

Faced with high costs, from gas and food to credit card and utility bills, many Americans are looking for ways to access extra money. For homeowners with enough Home is equalTwo options are stepping into the spotlight: reverse mortgage And Cash-out refinancing.

These financing choices can offer a lifeline for homeowners to access the equity in their home for funds to cover major expenses or manage unexpected expenses. However, they are not for everyone. Before signing on the dotted line, it helps to take a closer look at reverse mortgages vs. cash-out refinancing, how they work and who they can benefit most.

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What is a reverse mortgage?

A Reverse mortgage Primarily designed for retired seniors who need extra funds to manage day-to-day expenses who want to tap into the value of their home without selling it. As such, this home loan allows homeowners age 62 and older to access their home equity.

But unlike a traditional mortgage where you must make monthly mortgage payments to your lender, a reverse mortgage takes part of your home equity and converts it into cash for you. You can receive funding as a fixed monthly income, line of credit or as a lump sum payment.

One of the primary benefits of a reverse mortgage for older homeowners is that you don’t have to pay the loan back as long as you continue to live in the home. However, you must repay the loan if you sell, move, or move your home. At that point, the loan must be repaid, which is usually done by selling the home.

When would it be better to open?

A reverse mortgage can be a good option for homeowners without the income necessary to qualify for a loan that requires immediate repayment, such as a cash-out refinance. Home equity loan or HELOC. Reverse mortgage loan Can also be beneficial if you have enough equity in your home but need help meeting your daily expenses. You can get the financial relief you need without losing your home.

“It’s the only mortgage you can take out that doesn’t require payments while you’re alive and living in the home,” says Craig Garcia, president of Capital Partners Mortgage Services, LLC. “There’s no other way to do it. A reverse mortgage isn’t the cheapest money you can borrow, but it’s the only money you can borrow and pay back later when you sell or die.”

Added Garcia: “That interest can be deferred indefinitely. You also retain ownership of the home, contrary to what some people think.”

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What is a cash-out refinance?

Like a reverse mortgage, a cash-out refinance is a home loan that enables you to access your home equity for the cash you need. Cash-out refinancing is a popular financing option used to pay off high-interest debt, cover home improvement projects, or finance major purchases.

A Cash-out refinancing works Swaps your existing mortgage for a larger one that may have a new interest rate, repayment term and monthly mortgage payment. Since a cash-out refinance is for more money than your existing balance, you get to keep the difference in cash. Remember, larger balances usually increase your payments over time, even if your new loan has a lower interest rate.

You need enough home equity to qualify for a cash-out refinance, with most lenders limiting your borrowing to 80% of your home’s value. This amount includes your current loan balance and the equity you want to tap for funding.

When would it be better to open?

Cash-out refinancing is a good option when interest rates are lower than when you first took out your original mortgage, which can save you money in interest payments over the life of the loan. A cash-out refinance can make sense if you have a steady income and can comfortably make the payments. In contrast, a reverse mortgage does not require monthly payments, which is why many retirees prefer them.

Cash-out refinancing can be wise If you want to shorten your mortgage term, switch from an adjustable-rate mortgage to a fixed rate or switch from an FHA loan. Mortgage insurance On a conventional mortgage without additional insurance costs.

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Bottom line

As with any home loan, it’s wise to shop around and compare interest rates and repayment terms from multiple lenders. Best loan Pay special attention to your situation Closing costs which may offset the amount received from your equity. For example, loan origination fees for a reverse mortgage can range from $2,500 to $6,000, while closing costs for a cash-out refinance range from 2% to 6% of your new loan amount.

While both reverse mortgages and cash-out refinances allow you to tap into your home equity for a variety of needs, which one is best for you will depend on your unique situation. As such, consider consulting with your financial advisor or tax professional before making your decision, as they can help provide guidance based on your specific situation.