Written by: Dan Bardenhagen

A cash-out refinance and a reverse mortgage are two different ways to tap into home equity, and each comes with its own set of pros and cons. Here’s a breakdown to help you compare them:

Cash-Out Refinance

Pros:

1. Retain Ownership: You continue to own your home outright, without any obligations to sell or move.

2. Lower Interest Rates: Cash-out refinances often come with lower interest rates than reverse mortgages since they are typically conventional loans.

3. Flexibility: You can use the funds for any purpose—home improvements, debt consolidation, medical expenses, etc.

4. Tax Deductible Interest: In some cases, the interest paid on a cash-out refinance may be tax-deductible (if the funds are used for home improvements).

5. Long-Term Control: You maintain control of the property and can sell or refinance again in the future if needed.

Cons:

1. Repayment Requirement: You must repay the loan, usually through a monthly mortgage payment. If you can’t keep up with payments, the lender could foreclose.

2. Increased Loan Balance: The loan balance is increased by the amount you withdraw, which could take years to pay off.

3. Closing Costs: A cash-out refinance often comes with substantial closing costs, which can make it more expensive upfront.

4. Credit and Income Requirements: Lenders may require a good credit score and proof of income to qualify, making it less accessible for some homeowners, particularly retirees.

Reverse Mortgage

Pros:

1. No Monthly Payments: With a reverse mortgage, you don’t have to make monthly payments. The loan is repaid when you sell the home, move out, or pass away.

2. Access to Equity Without Selling: You can convert some of your home equity into cash without selling the home or taking on new monthly payments.

3. Non-Recourse Loan: The loan is “non-recourse,” meaning you or your heirs won’t owe more than the home’s value at the time of repayment, even if the loan balance exceeds the home’s value.

4. Ideal for Seniors: Reverse mortgages are specifically designed for homeowners aged 62 or older, often providing financial relief in retirement.

Cons:

1. Reduced Inheritance: Since the loan is repaid when you move out or pass away, the remaining equity in the home may be less, reducing the inheritance left to your heirs.

2. Higher Fees and Interest Rates: Reverse mortgages typically have higher fees and interest rates compared to traditional mortgages, which can erode equity more quickly.

3. Potential for Foreclosure: Although you don’t make monthly payments, you must continue to meet certain conditions (e.g., living in the home, maintaining it, paying property taxes, and insurance). Failure to do so could result in foreclosure.

4. Complexity: Reverse mortgages can be complicated to understand, with various terms and conditions that might make them difficult to navigate for some borrowers.

Key Differences:

• Repayment: A cash-out refinance requires regular payments, while a reverse mortgage doesn’t require payments until you sell or move.

• Eligibility: Cash-out refinances generally require better credit and income, while reverse mortgages are specifically for older homeowners (62+).

• Impact on Heirs: With a cash-out refinance, your heirs will inherit the home with the new, larger loan balance, whereas a reverse mortgage can reduce the home’s equity and inheritance.

Ultimately, the right option depends on your financial situation, how long you plan to stay in the home, and whether you’re looking for an income supplement or simply to lower your monthly payments.