Refinancing is Often Better than a Reverse Mortgage

Refinancing is Often Better than a Reverse Mortgage

If you are an elderly person, you own a home and you need money, should you consider getting a reverse mortgage or refinance instead?

For the most part, a reverse mortgage converts home equity into cash and it does it in several different ways that range from monthly payments, to an equity line of credit, to a one-time payout - or a combination.

The amount you can borrow against your home varies according to your age, the value of the house, current interest rates and loan fees.

Many financail planners believe that seniors should consider borrowing against the value of their homes only as a last resort.

If you find you must get access to the cash value of your home, it is usually smarter to refinance as a 30-year fixed loan than get a reverse mortgage.

Here's an example: Let's say you own a home valued at $400,000 and you find yourself in need of a large amount of cash for medical bills and you want a chunk of cash in the bank for future emergencies.

You borrow a combination of cash and up-front costs (incorporated into the loan) valued at $125,000 at 6 percent. Exclusive of taxes and insurance, you'd be paying back a little under $750 per month on a 30-year loan. Also, you won't need mortgage insurance because you still have plenty of unused equity.

The down side is the monthly payments. However, the fees for this type of loan are lower, and the equity you have left is not subject to interest or other costs that are associated with reverse mortgages.

The fact is that in a conventional mortgage, the money must be paid back starting right after closing, while reverse mortgage payments don't come due until the home is vacated. But, since the payments on a conventional mortgage are stretched out over a longer period of time, they are lower and easier to manage.

With reverse mortgages, younger borrowers cannot cash out as much equity as older borrowers due to lending rules. You must be at least 62 years old to qualify for a reverse mortgage, . Because lenders are repaid when the house is sold, it's entirely possible that a lender might have to carry the loan note for 20 to 25 years or more. Because of this, an 80-year-old is a more attractive loan candidate from the lender's perspective.

And for the borrower, whether they live five months or 25 years after the loan is closed, they still pay pretty stiff laon fees up front. But, the way it usually works out, older borrowers are less likely to accumulate as much interest as younger ones.

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