Reverse Mortgages vs. Cash Out Refinance Loans at Retirement

Compare cash-out refinance mortgages to reverse mortgage options

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Planning for retirement usually involves making sure home owners who wish to remain in their homes can afford to stay there for as long as they prefer despite reduced income levels. Many home owners may consider a reverse mortgage the best option, but a cash-out refinance may make sense in some situations.

While we would all like to retire with no mortgage, the reality for most home owners is that they still have mortgage debt when they retire. Many home owners have used equity in their homes for college education costs, to buy a second home or even just to consolidate debts over the years. When it comes time to refinance, home owners will need to consider different options due to reduced income levels.

Steps for choosing between reverse mortgages or cash out refinance loans

The first step is to decide if your goal is to stay in the home you own permanently or if you expect to move within a few years after retiring. The second step is to determine how much equity you have available in your home. The final step is to see what your cash flows will be over the time period that you expect to stay in your home.

If you want to stay in the home you own for as long as you are around on the planet, then a reverse mortgage might be best because reverse mortgages keep paying as long as you are alive and you are living in your home. Reverse mortgages are based on both the value of your home and your life expectancy, but any payments to you from a reverse mortgage will continue even if you exceed your life expectancy.

Reverse mortgages are almost always a good alternative even if not the best alternative. Safeguards and protections are built in to protect home owners, and most programs are sponsored by FHA and as a result are government regulated.

Reverse Mortgage Benefits

The biggest benefit of reverse mortgages over cash out refinances is that borrowers with reverse mortgages do not make any payments. In fact, borrowers who have substantial equity in their homes can actually receive regular monthly payments for as long as they stay in their home. Many home owners who have mortgage balances when they retire choose a reverse mortgage even if they will not get large payments each month because at the very least a reverse mortgage can eliminate your current monthly mortgage payment.

Although closing costs for reverse mortgages have come down substantially in the past few years, they are still significantly more expensive than regular refinance loans. Part of this extra cost results from the extra administrative work required to get these loans set up and then serviced over the long term.

For this reason, borrowers who do not expect to keep their home for a long period but have reduced income can look at simply doing a cash out refinance of their existing mortgage. Borrowers who have a lot of equity in their home can refinance not only their existing balance but also enough cash to finance their payments and living expenses until they sell their home.

Cash Out Refinance Loan Benefits

For example, a borrower with a home worth $400,000 and a $100,000 mortgage is retiring and wants to stay in their home for five years. Instead of getting a reverse mortgage, they could simply get a new mortgage for about $175,000 and put aside $60,000 to cover their payments for five years. While they would still have to make the payments, they would take advantage of lower closing costs, less restrictions than for reverse mortgages and usually lower interest rates than for reverse mortgages.

For a cash-out refinance or reverse mortgage rate quote along with advice as to which option is best for your needs, complete a free rate quote request now!.

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