How is a Reverse Mortgage Different From a Cash-Out Refinance?

When you’ve retired or are already approaching retirement, it is expected that you’ve prepared for this stage in your life. But with rising living costs and longer life expectancy, seniors often find themselves coming up short on funds.

The solution? Using your home equity to get a loan. Equity is an asset that seniors can use to borrow money.

The good news is there are various ways to use your equity to obtain much-needed cash.  If you are over 55, you can apply for a reverse mortgage or a cash-out refinance in San Tan Valley, AZ.

Let’s take a look at these two options and see what’s the right choice for you.

What is a Reverse Mortgage?

A reverse mortgage allows you to borrow a specific amount against your home equity. With this type of loan, you don’t pay any monthly installments but get payments from your lender either in a lump sum, line of credit, or monthly payments. 

This doesn’t mean that the loan is free, the interest on your reverse mortgage accumulates over time and when you decide to move out, sell or pass away, you or your family need to pay the full balance.

To qualify for a reverse mortgage you need to be 55 years or older with an equity of 50%. You need to attend a counseling session with an approved counselor from the Department of Housing and Urban Development.

Most reverse mortgages don’t have income or credit requirements so getting approved is easier. 

How does refinancing work?

Refinancing is another form of equity loan but works differently than a reverse mortgage.  A refinance is taking out a new loan to pay off your original loan. Homeowners use this strategy of refinancing to gain access to lower rates or lower payments. When existing interest rates are low, refinancing can save you tons of dollars in the long run.

Homeowners also refinance to switch to either a fixed rate or an adjustable rate or increase or decrease the amount of time they pay off the loan. These actions are also meant to reduce monthly payments and save money.

Advantages of Reverse Mortgages

Seniors may encounter a lack of funds when they retire and monthly mortgage payments are one of their biggest expenses. This is where a reverse mortgage comes in and supplements a diminished income and allows you to continue paying your bills.

Seniors may choose a reverse mortgage to add cash flow and finance their retirement. Reverse mortgages are also a good choice when you need money for home repairs and debt consolidation.

When seniors face income reduction they often sell their beloved home and move to a smaller property in a new location. Seniors love their homes and usually have no desire to leave. A reverse mortgage also allows seniors to continue living in their home where they are near to friends and family. 

It is also good to note that income from a reverse mortgage is tax-free and there are no limitations on where you can spend the money including medical expenses, student loans, or funding a vacation.

Advantages of Refinancing

An advantage of refinancing is getting lower interest rates compared to your current mortgage. The interest may also be tax-deductible. It is the cheaper option for most borrowers in the long run.

Refinancing allows you to go on building equity in your home which would benefit you once you sell or pass it on to your heirs.

Your spouse can also have peace of mind since she wouldn’t have to vacate the home if you move to long-term care, which is the case when you take on a reverse mortgage.

Refinancing also requires less equity to get loan approval. Most lenders ask for at least 20% equity but may ask for PMI if you have less than 20% equity available.

If you want to know which loan product is the right one for you, get advice from an experienced mortgage lender in San Tan Valley.

Moving Forward

Every homeowner's financial situation is unique. In most cases, a reverse mortgage is a good option if you are 55 and older and you don’t have enough savings, assets, and income.

A refinance on the other hand is the cheaper option and it allows you to continue building equity in your home.

If you are still undecided on whether a reverse mortgage or a cash-out refinance is the best option for you, Castle Rock Mortgage of San Tan Valley can help you make the right choice.

Let’s discuss your financial goals before making a decision. We’ll help you weigh the pros and cons so that you can come up with the best loan option for your situation.

Get in touch with one of our loan officers for a free consultation today!


* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.