Learn the differences between reverse mortgage vs refinance to see which option fits your needs. Find out about the pros, cons, and costs to make the best choice for your finances.
Meet Sarah, a 68-year-old retiree who’s been living in her family home for over 30 years. With retirement around the corner, Sarah is looking for ways to supplement her income and stay in her home. She’s heard about two options—reverse mortgages and refinancing—but she’s confused about which one is the best fit for her needs. Should she tap into her home equity without worrying about monthly payments, or should she refinance her mortgage to lower her payments and potentially access some of her equity?
Sarah’s story is a common one. Many homeowners in their golden years face the dilemma of choosing between a reverse mortgage and refinancing. In this guide, we’ll break down the differences between the two options, helping you make an informed decision.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan for homeowners aged 62 or older. It lets you turn some of your home’s value into cash. Unlike regular mortgages, you don’t make monthly payments. The loan is paid off when you sell the home, move out, or pass away.
How It Works?
Access to Home Equity: You can get the cash in different ways:
- Lump Sum: A one-time payment.
- Monthly Payments: A fixed amount every month.
- Line of Credit: Access funds when you need them.
Repayment: The loan is paid back when you sell the home or leave. The home is usually sold, and the loan is repaid from the sale.
Interest: Interest is added to the loan, and the amount owed increases over time.
Eligibility
- You must be 62 years or older.
- The home must be your primary residence.
- You need enough equity in the home.
Things to Know
- No Monthly Payments: Unlike regular loans, you don’t make payments each month. The loan balance grows over time.
- Loan Amount: How much you can borrow depends on factors like your age, the home’s value, and interest rates.
- Costs and Fees: There are fees like closing costs and mortgage insurance, which can be added to the loan balance.
Types of Reverse Mortgages
- HECM (Home Equity Conversion Mortgage): The most common, government-insured reverse mortgage.
- Proprietary Reverse Mortgages: Private loans that may allow for higher loan amounts.
- Single-Purpose Reverse Mortgages: Loans offered by some government programs for specific needs, like home repairs.
A reverse mortgage can be helpful, but it’s important to think about how it fits into your long-term plans.
What is Refinancing?
Refinancing means replacing your current mortgage with a new one, usually to get better terms. People refinance to lower their interest rate, shorten the loan, or get cash from their home’s value.
How It Works?
- Access to Home Equity: You can borrow extra money by refinancing, called cash-out refinancing.
- Repayment: You make monthly payments on the new loan, which replaces the old one.
- Interest: The new loan might have a lower interest rate or better terms.
Eligibility
- You need a good credit score (usually 620 or higher).
- You should have enough income to afford the payments.
- You need enough equity in your home.
Types of Refinancing
- Rate-and-Term Refinancing: Changing the interest rate or loan term.
- Cash-Out Refinancing: Borrowing extra money from your home’s value.
- Streamline Refinancing: A quicker option for some government loans.
Reverse Mortgages vs Refinance
Reverse Mortgages vs Refinance, Which option suits your needs? Learn the key differences, pros, and cons to decide the best way to access your home’s equity and secure your financial future!
Eligibility
Reverse Mortgages
- Must be 55 or older (depending on the type of reverse mortgage).
- You need to own your home with significant equity (usually 50-70%).
- No credit or income checks.
Refinance
- No age limit, but you need a good credit score (usually 620 or higher) and steady income to qualify.
- You can refinance up to 80-95% of your home’s value, depending on your credit and income.
Pro Tip: If you’re over 55 and don’t want monthly payments, a reverse mortgage could be easier. For refinancing, you’ll need better credit and proof of income.
Loan Amount & Access to Home Equity
Reverse Mortgages
- You can borrow up to 55% of your home’s value.
- Funds are available without monthly payments.
Refinance
- You can borrow up to 80-95% of your home’s value.
- You must make monthly payments, but you get more money upfront.
Pro Tip: Refinancing gives you more money, but comes with monthly payments. Reverse mortgages are better for accessing funds without paying each month.
Repayment
Reverse Mortgages
- No monthly payments. The loan is repaid when you sell the home, move, or pass away.
- The loan balance grows over time.
Refinance
- Monthly payments are required to pay off the loan.
- The loan balance goes down as you make payments.
Pro Tip: If you want to avoid monthly payments, a reverse mortgage is better. If you can make payments, refinancing helps reduce your loan over time.
Interest Rates
Reverse Mortgages
- Usually higher interest rates because there are no monthly payments.
- Interest accumulates over time.
Refinance
- Typically offers lower interest rates, especially with good credit.
- Interest is paid regularly, so it doesn’t accumulate as quickly.
Pro Tip: Refinancing has lower rates if you can handle monthly payments. Reverse mortgages are good for no payments but come with higher rates.
Best For
Reverse Mortgages
- Great for seniors who need money but don’t want monthly payments.
- Good for paying for living costs or healthcare.
Refinance
- Best for homeowners who want to lower monthly payments or access more home equity.
- Ideal for home improvements or reducing debt.
Pro Tip: If you need money now and don’t want payments, go for a reverse mortgage. If you want to save on payments or improve your home, refinancing works better.
Taxes
Reverse Mortgages: No taxes on the loan amount. However, your heirs may need to sell the house to repay the loan.
Refinance: No taxes on the amount borrowed, but if you use the money for home improvements, you might be able to deduct interest.
Pro Tip: Refinancing could help save on taxes if you’re making improvements. Reverse mortgages won’t affect taxes, but your heirs may need to sell the home.
Application Process
Reverse Mortgages
- Easier and faster, with no credit or income check.
- Typically requires just a home appraisal.
Refinance
- More paperwork, including income verification and credit checks.
- The process can take several weeks.
Pro Tip: If you need money quickly and don’t want a lot of paperwork, a reverse mortgage is quicker. Refinancing takes more time but offers better terms.
Impact on Government Benefits
Reverse Mortgages: Won’t affect benefits like Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
Refinance: Could affect benefits, as the increased loan amount may impact income eligibility.
Pro Tip: If you rely on government benefits, a reverse mortgage is safer. Refinancing may affect your benefits.
Effect on Heirs
Reverse Mortgages: Your heirs may need to sell the home to repay the loan. They inherit less because the loan balance increases over time.
Refinance: Your heirs can inherit the home, but the loan must be repaid either by selling the home or other means.
Pro Tip: If leaving your home to your heirs is a priority, refinancing might be better. Reverse mortgages could reduce the home’s value for your heirs.
Ownership of the Home
Reverse Mortgages: You keep ownership of the home, but the loan must be repaid when you move, sell, or pass away.
Equity decreases over time.
Refinance: You retain full ownership and can build equity as you pay down the loan.
Pro Tip: If you want to keep ownership and grow your equity, refinancing is better. Reverse mortgages allow you to stay in the home, but your equity reduces over time.
Reverse Mortgage vs Refinance Comparison
Here’s a simplified Reverse Mortgages vs Refinance comparison in tabular form:
| Feature | Reverse Mortgage | Refinance |
|---|---|---|
| Purpose | Access equity without monthly payments | Replace existing loan for better terms or equity |
| Eligibility | Age 55+ (Canada), equity in the home | Meet income, credit, and home value requirements |
| Repayment | No payments; repay when home is sold or owner dies | Monthly payments required |
| Costs | Higher fees (2-5% of home value) | Standard closing costs (2-3% of loan amount) |
| Loan Type | Lump sum, line of credit, or periodic payments | Fixed or variable rates |
| Ownership | Retain ownership (must maintain taxes, insurance) | Retain ownership, same responsibilities |
Best Use Cases for Reverse Mortgages vs Refinancing
When to Choose a Reverse Mortgage vs. Refinancing
Reverse Mortgage
For Seniors (62+): Works for people 62 or older who need money but don’t want to make monthly payments.
No Monthly Payments: Ideal for those who can’t afford payments but still want to live in their home.
Extra Cash: Good for covering living costs or home repairs.
Stay in Your Home: You can live there as long as you want.
Refinancing
Lower Payments: Good if you want to lower your interest rate or monthly payments.
Pay Off Faster: Helps if you want to pay off your mortgage sooner.
Get Extra Money: You can borrow money for things like home repairs or bills.
Good Credit & Income: Works if you can still afford monthly payments.
Summary
Reverse Mortgage: Best for seniors who need cash and can’t make payments.
Refinancing: Good for people who want lower payments, to pay off faster, or need extra money but can afford payments.
Common Misconceptions of The Buyers
Is a Reverse Mortgage the Same as Refinancing?
No, reverse mortgages and refinancing are different types of loans.
Reverse Mortgage: Allows you to borrow against your home’s equity without making monthly payments. The loan is repaid when you sell the home or pass away. It’s mainly for seniors aged 62 or older.
Refinancing: Replaces your current mortgage with a new loan, often to get a lower interest rate or access more equity. Monthly payments are still required.
Pro Tip: Reverse mortgages are great for seniors looking for extra cash without monthly payments. Refinancing is better for homeowners who want to reduce their mortgage payments.
Who Benefits Most from a Reverse Mortgage?
Reverse mortgages are best for homeowners aged 62 or older who:
Have substantial home equity but may have limited income or savings.
Want to stay in their homes for the long term but need extra cash for living expenses, healthcare, or home repairs.
Don’t mind the loan growing over time, as long as they don’t have to make monthly payments.
Pro Tip: If you’re a senior looking for extra money and don’t want monthly payments, a reverse mortgage could help you stay in your home.
What Is the Negative Side of Refinancing?
While refinancing offers benefits, there are some downsides:
Closing Costs: Refinancing often comes with high closing costs (fees for appraisals, title searches, etc.), which can eat into any savings.
Longer Loan Term: If you extend your mortgage term, you could pay more interest in the long run.
Monthly Payments: You’ll still have to make monthly payments, which might be difficult for those on a fixed income.
Pro Tip: If you can’t afford the upfront costs or don’t want to extend your loan term, refinancing might not be the right choice.
Can You Take Cash Out on a Reverse Mortgage?
Yes, you can take cash out with a reverse mortgage.
This is called a cash-out reverse mortgage, where you borrow against your home’s equity, and the loan can be received as a lump sum, monthly payments, or a line of credit.
The amount you can take out depends on your home’s value, your age, and the equity you have in your home.
Pro Tip: If you need immediate cash for something like medical bills, a reverse mortgage might provide the funds without monthly payments.
Reverse Mortgage vs Refinance Pros and Cons
Confused about Reverse Mortgage vs. Refinance? Discover the pros and cons of each option and how mortgage refinancing Canada could save you money or unlock equity for your future!
Reverse Mortgage Pros
- No monthly payments.
- Loan doesn’t have to be repaid until you sell or move out.
- Helps seniors access home equity without affecting retirement income.
Reverse Mortgage Cons
- High interest rates.
- Reduces the home’s value for your heirs.
- Can lead to loss of home equity over time.
Refinance Pros
- Lower interest rates if you have good credit.
- Can reduce monthly payments.
- Allows homeowners to access more of their home’s equity.
Refinance Cons
- Requires monthly payments.
- Can be expensive due to closing costs.
- May require credit and income verification.
Pro Tip: A reverse mortgage is better if you don’t want to make monthly payments. Refinancing is better if you want to lower payments and have good credit.
Reverse Mortgage vs Refinance Cost
Wondering whether a reverse mortgage or refinance is the right choice for you? Compare the costs, benefits, and insights from the best mortgage lenders in Canada to make an informed decision about your financial future!
Reverse Mortgage Costs
Can include high origination fees, appraisal fees, and insurance premiums. These costs can add up to 2% to 3% of the home’s value.
Since there are no monthly payments, the loan balance grows over time, which can lead to a higher cost in the long term.
Refinance Costs
Refinancing also includes closing costs (like an appraisal, title search, and application fees) which typically range from 2% to 5% of the loan amount.
There may also be prepayment penalties on the old loan, depending on the terms.
Pro Tip: Compare the costs carefully. Refinancing might have lower initial costs, but a reverse mortgage may be a better option for those needing funds without the burden of monthly payments.
How AJP Can Help?
AJP is here to guide you through your mortgage journey, whether you’re considering refinancing or a reverse mortgage. Here’s how we can assist you, with case studies for each point to show how we’ve helped others in similar situations:
Expert Guidance
AJP offers clear and simple advice on both reverse mortgages and refinancing so you can make the best decision.
Case Study: Sarah, a 68-year-old homeowner, was confused about whether a reverse mortgage or refinancing was best for her. After consulting AJP, she received clear guidance on how a reverse mortgage would allow her to access her home’s equity without monthly payments. She decided to move forward with the reverse mortgage, easing her financial stress.
Personalized Solutions
We provide mortgage solutions tailored to your unique financial situation.
Case Study: John and Alice, both in their 70s, needed extra funds to cover retirement costs. AJP assessed their home’s value and income situation and recommended a reverse mortgage. This allowed them to access cash while remaining in their home, perfectly matching their needs.
Simplified Process
AJP simplifies the mortgage process and helps you navigate it step-by-step.
Case Study: Mark was overwhelmed by all the paperwork involved in refinancing his home. AJP simplified the process for him by explaining each step and handling the paperwork. With AJP’s help, Mark refinanced his mortgage and saved money without any stress.
Reliable Support
We provide ongoing support to ensure you feel confident in your decisions.
Case Study: Lisa, a single homeowner, was unsure whether to refinance or take out a home equity loan for home improvements. AJP supported her by answering all her questions and explaining the long-term effects of each option. With AJP’s help, she chose to refinance to get a lower interest rate, which reduced her monthly payments and gave her funds for home renovations.
Comprehensive Education
AJP educates you on your options so you can make an informed decision.
Case Study: Peter, a 60-year-old retiree, wasn’t sure how refinancing could benefit him. After working with AJP, he learned about the benefits of lowering his interest rate and consolidating debts through refinancing. This education helped him make an informed decision that improved his financial situation.
Assess Financial Goals
We help you assess your long-term financial goals to find the best option.
Case Study: Nancy and Tom wanted to retire soon and downsize. AJP assessed their financial goals and recommended a reverse mortgage so they could access their home’s equity without monthly payments, allowing them to retire comfortably and downsize when ready.
Streamlined Application Process
We handle all the paperwork and processes, making things quicker and easier for you.
Case Study: Brian wanted to refinance his mortgage but was intimidated by the paperwork. AJP took care of the application, walking him through every detail. In just a few weeks, Brian refinanced his mortgage at a lower rate and reduced his monthly payments without hassle.
Avoid Mistakes
AJP helps you avoid common mistakes that can arise during the mortgage process.
Case Study: Helen was considering a reverse mortgage but wasn’t sure about the terms. AJP made sure she understood the repayment process and explained all the fees involved. By avoiding common mistakes, Helen was able to make the right choice and felt confident moving forward.
Transparent Fees
We clearly explain all costs involved so there are no surprises.
Case Study: Rob and Emily were concerned about hidden fees when refinancing. AJP explained all costs upfront, including closing fees and any potential penalties. With full transparency, they moved forward with refinancing and saved money on their monthly payments.
Ongoing Assistance
AJP continues to provide support even after you’ve secured your loan.
Case Study: Steve refinanced his mortgage through AJP to reduce his interest rate. A year later, he contacted AJP again for advice on adjusting his payments. AJP helped him adjust his loan terms and continue saving money.
By working with AJP, you get personalized, expert support that guides you every step of the way. We’re here to help you find the right mortgage solution and make the process as easy as possible.
Conclusion: Which Option is Best for You?
Reverse Mortgage is ideal for seniors who need extra income and don’t want the burden of monthly payments. It allows you to tap into your home’s equity without the need for a monthly mortgage payment. However, it’s important to consider the costs and the impact on inheritance.
Refinancing is better for homeowners who have the income to make monthly payments and are looking to improve their loan terms or access some of their home equity. It offers the opportunity to reduce monthly payments or shorten the loan term.
If you’re not sure which option is right for you, AJP Mortgage can help guide you through the process, offering expert advice on both reverse mortgages and refinancing. We’ll work with you to determine the best solution for your financial goals.
