Refinancing vs. reverse mortgage

Posted by  on Mar 22, 2012

Some older homeowners may be wondering if it makes sense to refinance or get a reverse mortgage. Both types of loans have benefits and drawbacks, so it is important to find out as much information as possible before applying for a mortgage. Here are some things to consider about both types of mortgage loans.

Do you have home equity?

Whether you plan to apply for a refinance or a reverse mortgage, you'll need to have some home equity. Being underwater on a mortgage loan probably won't help your efforts to get a new home loan. A reverse mortgage is definitely out of the question if you don't have equity, but depending upon your situation you might be able to get a modification or refinance.

Refinancing to lower payments

Many homeowners who choose to refinance are looking to lower their monthly payments. Current mortgage rates are so low that it is likely you will significantly reduce your monthly payments if it has been a while since you borrowed your mortgage. Refinancing could also allow you to get rid of mortgage interest (MI) payments if you have at least 20 percent equity in your home.

There are no age restrictions on doing a refinance. If you have good credit, a steady source of income and enough home equity, you have a shot at getting approved. You also might boost your chance of being approved for a mortgage refinance if you have cash to bring to closing to increase your home equity.

Mortgages for seniors

Reverse mortgages are only available to people aged 62 and up. You don't need a job with documented income because these mortgages don't require you to make monthly payments. Instead, reverse mortgages convert some of your home equity to cash. That helps people who are on a fixed income and need an additional source of cash.

When you get a reverse loan, you will receive the money as a lump sum of cash, through installments, as a line of credit or some combination of all those forms of payments. Once you get the money you can spend it pretty much on anything you choose. You can even use a Home Equity Conversion Mortgage (HECM) to purchase another house as long as it will be your primary residence. So if you plan to downsize, a reverse mortgage could help.

Despite the positives of reverse mortgages, there are some drawbacks. Reverse loans often have a lot of fees, so it is important that you familiarize yourself with all the costs involved with borrowing money. You also cannot get a reverse mortgage if your spouse is listed on the property deed and is not yet 62 years old. Finally, reverse mortgage loans can complicate estate planning, so it is important to decide whether or not you want your heirs to inherit your home before applying for a reverse loan.


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