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?
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.
Monthly Payments
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.
Available Cash
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.
Fees
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.
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. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
