Refinancing vs. Reverse Mortgage: Which One?

When managing your home finances, various options are available to homeowners. Two popular choices are refinance mortgages and reverse mortgage. Each serves a distinct purpose, catering to different financial needs. 

In this blog post, we’ll highlight the key differences between the two and help you determine which option might be the right fit for you.

What is mortgage refinancing? 

This strategy is when homeowners decide to refinance their house. It is a new loan that replaces your existing mortgage. It’s like hitting the refresh button on your home loan, and people often opt for this option to take advantage of better terms and lower interest rates or access the equity they’ve built up in their homes.

What is a reverse mortgage? 

A reverse mortgage is a financial product specifically designed for homeowners aged 62 and older. Unlike traditional mortgages, where you must pay your lender money each month, a reverse mortgage lets you convert a portion of your home equity into cash without selling your property. Importantly, no monthly mortgage payments are required, and the loan is typically repaid when you move out of the home or pass away.

Differences Between Mortgage Refinancing and Reverse Mortgage

Refinancing and reverse mortgages serve distinct purposes and cater to different financial needs. Here are the key differences between the two:

Purpose and borrower eligibility

• Refinancing: The primary purpose is often to secure better terms, lower interest rates, or tap into home equity for various financial needs. It is available to homeowners of any age.
• Reverse mortgage: This is designed to provide a source of income for retirees by accessing home equity without selling the property, so it’s exclusive to homeowners aged 62 and older.

Loan structure

• Mortgage refinancing: Taking out a new loan with modified terms, often including a new interest rate and loan duration.
• Reverse mortgage: Transforms a segment of home equity into funds, offering choices such as receiving a lump sum, monthly payments, or establishing a line of credit.

Loan repayment

• Refinancing: Requires monthly mortgage payments, and the goal is to repay the loan in total over the loan term.
• Reverse mortgage: There is no obligation for monthly payments. The loan repayment occurs when the homeowner decides to move out or in the event of their passing. The accumulated loan balance is often settled through the sale of the home.

Cash flow

• Mortgage refinancing: Provides potential savings through reduced monthly payments or access to lump-sum cash through home equity.
• Reverse mortgage: Offers a stream of income for retirees without monthly repayments, providing financial flexibility during retirement.

Homeownership status

• Refinancing: This can be used by any homeowner, whether they own their home outright or have an existing mortgage.
• Reverse mortgage: Typically, the homeowner should own their home outright or have a significant amount of equity.

Income source

• Refinancing: Does not provide a direct income source but may result in lower monthly payments, freeing up funds for other purposes.
• Reverse mortgage: Provides a source of income, allowing seniors access to their home equity without selling the property.

Which option is for you?

Choosing between refinancing and a reverse mortgage depends on your financial goals, age, and circumstances.

If you want to reduce your monthly payments, secure a lower interest rate, or consolidate debts, a refinance mortgage might be better.

On the other hand, if you are a homeowner aged 62 or older seeking a source of income without the burden of monthly payments, a reverse mortgage could be a suitable option.

Before making a decision, it’s crucial to consult with financial advisors and mortgage experts and explore the terms and conditions of each option. Consider your long-term financial goals, current mortgage terms, and overall financial health to determine which path best fits your situation.