Comparing Reverse Mortgages to Cash-Out Refinancing

Cash-out refinancing and reverse mortgages are two of the best ways to leverage your home equity. With them, you can tap into untouched cash and put it towards unexpected life events, major purchases, retirement planning, and more. Not sure which option is the better fit for your needs? Learn the differences between a cash-out refinance and reverse mortgage to help you decide which home lending solution is right for you.

• What Is a Cash-Out Refinance?
• What Is a Reverse Mortgage?
• Similarities Between Cash-Out Refinancing & Reverse Mortgages
• Differences Between a Cash-Out ReFi vs Reverse Mortgage
• Should I Cash-Out Refinance or Apply for a Reverse Mortgage?
• A Unique Home Equity Alternative

  What Is a Cash-Out Refinance?

  A cash-out refinance is a low-stress refinancing strategyin which homeowners replace their existing mortgage with a new, larger one. As part of the cash-out refi process, you'll receive a cash payment that reflects the difference between the two loan amounts, which you can then use to alleviate any pressing financial needs.
  
  In order to qualify for a cash-out refinance, you typically must have at least 20% equity in your home, a stable income, and a good credit score, though these requirements will vary from lender to lender.
  
  

  Pros of Cash-Out ReFi

  
  
  It's important to consider the pros and cons of cash-out refinancing, which include:
  
  
  • Lower Interest Rates: If current mortgage interest rates are lower than the rate you're paying for your existing mortgage, a cash-out refi could secure lower monthly payments for you.
  • Tax Deductions: You may be eligible for tax deductions on the interest you pay on your cash-out refinance.
  • Stable Loan Terms: 30-year fixed-rate mortgages are common for cash-out refinances, which come with repayment terms that do not vary from month to month.
  
  
  

  Cons of Cash-Out ReFi

  
  
  
  • Additional Costs: Closing costs, such as application fees and appraisal fees, will add to the overall cost of cash-out refinancing.
  • Foreclosure Risk: If you are unable or fail to make your new mortgage payments, you could enter foreclosure and put your home ownership at risk.
  • Decreased Home Equity: Taking out a cash-out refi erases the equity you've built up in your home and could limit your ability to benefit from property appreciation in the future.

  What Is a Reverse Mortgage?

  A reverse mortgage is a tax-free home loan that allows homeowners over the age of 62 to convert a portion of their home equity into cash. A reverse mortgage is unique in that it involves lenders making payments to the borrower, as opposed to a conventional mortgage where borrowers pay the lender.
  
  For you to be eligible for a reverse mortgage loan, your home must be your primary residence (not be a rental property, investment property, or vacation home). Additionally, you must either own your home or have built up a substantial amount of equity in it. Keep in mind that reverse mortgage requirements may vary depending on whether you have a home equity conversion mortgage (HECM) or a proprietary reverse mortgage provided by a private lender.
  
  

  Pros of Reverse Mortgages

  There are many pros and cons of reverse mortgages, including:
  
  
  • Financial Stability: The payments you receive from your reverse mortgage can be used to pay off your existing home loan, or as a cushion to support your income and savings.
  • No Income Taxes: Because the money you receive through your reverse mortgage is not considered income, you're not required to pay taxes on any cash you obtain.
  • Multiple Payment Methods: Receive funds in a way that suits your financial situation, with payment options including a lump sum, monthly payments, and a line of credit.
  • Retain Home: Tap into the equity you've built in your home while continuing to live in it.
  • Secure Against Market Fluctuations: You won't be liable for any more than the home's appraised value when the loan is due for repayment, even if the housing market experiences a downturn.
  
  
  

  Cons of Reverse Mortgages

• Potential for Foreclosure: If you were to miss payments or fall behind on maintenance fees, property taxes, or other costs for the upkeep of your home, there is a greater risk of losing your home.
• Reduced Home Equity: The equity that you own in your home decreases as your reverse mortgage loan balance grows over time.
• Additional Expenses: A reverse mortgage comes with extra expenses, like monthly servicing fees, attorney services, origination and closing costs, and more.
• Effect on Government Benefits: Eligibility for government benefits such as Medicaid and supplemental security income (SSI) may be impacted by a reverse mortgage.
• Complicated Terms: Though borrowers experience support and counseling, reverse mortgages are long-term commitments that can be hard to understand and navigate.

Similarities Between Cash-Out Refinancing & Reverse Mortgages

Cash-out refinancing and reverse mortgages share a handful of similarities as financial solutions. Most notably, both involve using your home as leverage to access funds based on the equity you've accumulated. With either option, this requires you to restructure your existing mortgage and has the potential to impact home ownership. In addition, cash-out refi and reverse mortgages are similar in that they offer tax deductions. Both options may also involve additional fees, like closing costs and other expenses.

Differences Between a Cash-Out ReFi vs Reverse Mortgage

Despite their similarities, cash-out refinancing and reverse mortgages do have key differences. A cash-out refi works more like a traditional mortgage, where a homeowner makes monthly payments on the loan. While cash-out refinancing is an option available to a wide range of homeowners, reverse mortgages are designed specifically for people ages 62 and older. With a reverse mortgage loan, home equity is converted into cash without the need to make monthly payments and is instead repaid when the homeowner no longer occupies the property.

Requirements

• Cash-Out Refinance: You must have a good credit score, reliable means of income, and at least 20% equity in your home.
• Reverse Mortgage: You must own your home or have a significant amount of equity in it, and be at least 62 years old.

Disbursement

• Cash-Out Refinance: You will receive a single lump-sum payment.
• Reverse Mortgage: You can receive a lump sum, a line of credit, monthly payments, or a combination of these options.

Repayment

Cash-Out Refinance: You will make monthly payments over an agreed-upon loan term.

Reverse Mortgage: You are not required to make fixed or monthly payments during the life of the loan. Instead, the loan is usually repaid in full or refinanced when you sell your home or pass away.

Should I Cash-Out Refinance or Apply for a Reverse Mortgage?

Choosing between a cash-out refinance or reverse mortgage can be challenging. In order to determine which option is best for you, take a look at the advantages and disadvantages of each solution and consider which factors align best with your financial goals.

When considering a cash-out refinance, it's important to ensure you have the ability to take on monthly payments. Current mortgage terms and interest rates can play an equally crucial role in your decision-making. For instance, a cash-out refinancing loan may be a great option if rates are lower than your existing mortgage.

Eligibility is also worth noting. If you're older than 62 and have a significant amount of equity in your home, a reverse mortgage may be right for you. A cash-out refinance, on the other hand, typically requires a minimum credit score, but is available to a wider age range.

A Unique Home Equity Alternative

If you have hesitations about these home lending options, Unison offers alternatives to cash-out refinancing and reverse mortgages that allow you to tap into your home's equity without any added interest, debt, or monthly payments.

The process is simple. Through an equity sharing agreement, Unison converts up to 15% of your home's value to cash without creating more of a financial burden. You maintain complete ownership of your home and can use the cash to pay off debts, save for retirement, or spend it how you need.

Throughout the 30-year term, you have the option to buy Unison out or settle the home equity sharing agreement when selling your home. If the value of your house increases, Unison shares in the profits. If your home's value decreases, we share in the loss.

Discover how much home equity you can access with a free estimate today.




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