The outlook for homeowners has changed a lot in the last few years. The economy has been shaky, and many people are underwater with their mortgages. This makes these loans more desirable than ever before.
Homeowners are finding ways to save money on their mortgage payments each month. Consulting a mortgage lender can help analyze your finances to help determine the best loan products.
One popular idea is a reverse mortgage where you turn your home’s equity into cash. The cash you receive can then be used as you see fit. The only problem is that there are so many options available when thinking about making this type of investment that it can be difficult to choose between reverse mortgages or cash-out refinances. So, before you make a decision, it is always better and wise to choose a local mortgage lender to avoid any mistakes.
What is a Reverse Mortgage?
A reverse mortgage is a special type of home loan that allows people over the age of 62 to take out a large sum of money to pay for their home expenses, as long as they can make their payments sufficiently during the term of the loan.
The loan amount is based on the value of the home at the time of purchase, and it is repaid over time with monthly payments that are roughly equivalent to the borrower’s monthly housing expenses plus about 5 percent interest. For example, if your house is worth $200,000 when you take out a reverse mortgage, you’ll owe $210 per month ($200,000 x 1/12). That’s what you’ll pay each month for 30 years until your home is paid off — provided you keep up with regular payments like all other loans on your credit report.
However, to qualify for a reverse mortgage, you must be 62 years old or older and have owned your home for at least five years. Also, you should have an income that is elevated enough above any potential costs involved in paying off the loan.
Relevant Reading: How to Refinance a Reverse Mortgage: The Ultimate Guide
What is a Cash-out Refinance?
Cash-out refinance is one of the most popular ways to borrow extra cash to begin your next chapter in life. With a cash-out refinance, you sell your home, get a mortgage loan and purchase a new home at the same time as you earn more money each month in interest payments by moving out. Cash-out refinances also happen all at once — unlike reverse mortgages, which are phased out over time and don’t offer a lump sum payout of cash. However, reverse mortgages require upfront costs (licensing fees and appraisal costs), while cash-out refinances can be cheaper depending on your situation.
There are two types of cash-out refinances:
- Cash-out refinancing of an existing mortgage (also called a “second mortgage”). You take out a new second mortgage with the same amount of money as your current mortgage, but with a shorter term. The new loan will be secured by the value of your home (not the property itself). This is sometimes called a “time-crunched” refinance because it allows you to get rid of one mortgage while paying off another.
- Cash-out refinancing of an existing second mortgage (also called a “third mortgage”). You take out a new second mortgage with the same amount of money as your current second mortgage, but with a shorter term. The new loan will be secured by the value of your home (not the property itself). This is sometimes called an “interest rate reduction” because it allows you to get rid of one debt and lower your interest rate on another.
Reverse Mortgage vs. Cash-Out Refinance: The Differences
When it comes to taking out equity from your home, there are two main options: a reverse mortgage and a cash-out refinance. Both options can be beneficial in different situations, but it’s important to understand the key differences between the two before making a decision.
- With a reverse mortgage, you are essentially taking out a loan against your home equity that doesn’t have to be repaid until you either sell the home or pass away. This can be a good option for seniors who want to stay in their homes and don’t need the extra monthly income from a traditional mortgage.
- A cash-out refinance, on the other hand, allows you to access your home equity and use it for other purposes, like home improvements or consolidating debt. With this option, you will still have a monthly mortgage payment, but it could be lower than your current payment if you get a good interest rate.
- So, which one should you choose? It depends on your situation and what your goals are. If you need extra monthly income and don’t mind taking on more debt, a reverse mortgage could be a good option.
How to Choose Among Reverse Mortgage & Cash-Out Refinance
If you want to know how to choose between reverse mortgage vs. cash-out refinance, here are three important things to consider:
Types of Loans Available
Are you looking for a loan that allows for a cash-out refinance or reverse mortgage? The two types of loans are very different and differ in how they work and what options are available to borrowers.
How Much Can You Afford to Borrow?
How much you can afford will also affect your decision, as well as the interest rate and fees associated with each option.
How long it will take to get your money back from the lender. The timeline is one thing that impacts which option is best for you, so make sure you understand how long it could take before your loan is repaid in full, as well as any early termination fees associated with each option.
When is a Reverse Mortgage Better?
When you’re looking at getting a reverse mortgage, the first thing you’ll want to know is when it’s better than other options. The best reason to get a reverse mortgage is if your home is worth less than what you owe on it. You might have paid off or refinanced your home and be in the process of trying to sell it for cash. But instead of selling the home and getting your money right away, you may decide to keep it and use a reverse mortgage as a way to pay off the remaining balance.
If you have any equity left in your home when you want to take out a reverse mortgage, then this option will be better than just paying your remaining balance off over time with monthly payments because it can be done all at once. That’s because there are no extra costs involved with taking out one of these loans — they’re structured so that all interest payments are applied directly against whatever principal remains outstanding when the loan closes (and not just against principal).
Reverse mortgages are available in an increasing number of states, including California, Florida, Georgia, Hawaii, Illinois, and New Jersey (though they’re currently not offered in Maryland). Reverse mortgages allow seniors to take out up to 80% of the equity in their home to finance living expenses without making monthly mortgage payments on top of their existing Social Security check or retirement plan benefits.
When is a Cash-out Refinance Better?
If you’re considering a cash-out refinance, you’ll need to know why it’s better than other options. Here are some of the most common reasons:
It’s not as expensive as a traditional mortgage refinance. A traditional mortgage refinance involves taking out new loans and paying them off with the proceeds from your old mortgage. With a cash-out refinance, all of the money goes directly into your checking account instead of being paid out to another party (the lender). This means that you don’t have to deal with monthly payments or interest on any part of the loan; however, it also means that there are no additional fees associated with this type of loan.
Recommended Reading: How to Find the Best Mortgage Lender
Contact Your Texas Mortgage Lender Today!
If you have decided to refinance your home in Texas, it is important to understand the difference between a reverse mortgage and a cash-out refinance. Understanding these differences will help you decide which option might be best for your financial situation. At Lone Star Financing, our team of experienced mortgage lenders in Texas will help you choose the best mortgage option. To learn more about Texas reverse mortgages, get in touch with us!