Saving money for retirement is a long commitment. Often, when you reach retirement age, you find that your retirement income isn’t enough to support your lifestyle. As you enter your golden era and consider various options for additional income, home equity loans have the potential to provide you financial security.
There are many different ways to get payments on your home’s equity including HELOC, reverse mortgage, refinancing and more – but what is the difference between them? Let us start with reverse mortgage vs refinancing.
What is Reverse Mortgage?
A reverse mortgage allows you to borrow a particular amount against your home equity. In this you don’t pay any mortgages instead, the lender pays you. The interest on the reverse mortgage accumulates over time and you or your family has to pay the full balance when you move out, sell your home or pass away. To qualify for a reverse mortgage, you must be 62 or older and you should be the primary residence of your home.
What happens when the borrower or homeowner dies with a reverse mortgage?
If the borrower or homeowner dies with a reverse mortgage, the eligible spouse can live in the home with the same mortgage terms. But after the death of you and your eligible spouse, the heirs are held responsible for repaying the balance.
Pros: No monthly payments, ability to take payment in a lump sum, monthly income, a line of credit or combination of all. Further, income from the reverse mortgage is tax-free and you can use it for anything you want including medical expenses, home repair or daily needs.
Cons: Fees and closing costs for a reverse mortgage is a little high. In addition, when you take a home equity loan, you cannot pass your house to your heir after death. If heirs wish to keep the home, they have to pay the loan amount.
What is Refinancing?
A cash-out refinance is another form of an equity loan, but it works differently than a reverse mortgage. A refinance replaces your existing loan with a new mortgage for a larger amount than you currently owe. The new loan will repay your current mortgage and you will receive the remaining cash in a lump sum.
What are the pros and cons of refinancing?
Pros: Most of the time the interest rate is lower than rates for home equity loans. The interest may be tax-deductible.
Cons: You have to pay monthly payments, paying interest on funds prior to needing the money.
There are many other options like traditional loans and HELOC that many of you think about. But if you are 62 or older reverse mortgage works best for you, especially when you are running low at monthly income. Let’s understand the difference between the reverse mortgage and other loan options.
Reverse Mortgage Differences from Traditional Loans
When it comes to comparing reverse mortgages with traditional loans, there are many similarities and differences.
Reverse mortgage and traditional loans both allow you to borrow money based on the equity in your home. The biggest difference between these two is that you do not need to pay monthly payments on the reverse mortgage. But, in case of a traditional loan you have to make monthly payments.
The reverse mortgage pays off your traditional mortgage first, and you can use the remaining money in any way you want. Also, with a reverse mortgage, you have protection against declining home values because it is a non-recourse loan.
Reverse Mortgage Vs HELOC
What is HELOC?
A home equity line of credit (HELOC) is a home equity loan that allows homeowners to borrow money against the equity in your home. But, it has some limitations and may carry the risk of foreclosure. Let’s have a look at reverse mortgage vs HELOC.
- With a HELOC, you have to pay monthly interest payments when you withdraw the money from your account. But, with a reverse mortgage, you don’t have to make any monthly payments.
- For a HELOC, you should have a good credit score. Whereas, to qualify for a reverse mortgage the only factors which matter are equity in your home and your age which is 62 or older.
- Reverse mortgage interest rates are fixed and do not change over the course of the term, while HELOC rates are variable.
Reverse Mortgage Calculator
Reverse mortgage calculator helps you determine the minimum value of equity in your home that you need to qualify for a reverse mortgage. It determines your eligibility and the amount you may qualify for. The qualification depends upon your home value, any existing mortgage balance, and your age.
You can use our reverse mortgage calculator to know your qualifications. It is easy to use and helps you with the exact estimate about how much amount you may receive from reverse mortgage.
In most of the cases, a reverse mortgage is best when you’re 62-years or older and you don’t have any enough savings, investments and income. The reverse mortgage does not demand any monthly payments from you, you have to pay the balance when the plan to move out from your home or pass away. But, in the case of refinancing you need to pay monthly installments.
So, if you are planning for reverse mortgage consult a professional adviser like Brett because a reverse mortgage can be complicated. And, Brett can help sort through your situation.