Refinancing vs. Reverse Mortgage

July 22, 2024

As we age, the significance of making sound financial decisions grows. Many choose to tap into their home equity in their retirement years, and two options are important to know: FHA reverse mortgages and FHA refinancing.

Each option has advantages and drawbacks. Understanding these differences is key to making an informed choice.

FHA Reverse Mortgage Pros and Cons

A reverse mortgage is an option for qualifying seniors who want to add to their monthly cash flow. There are no monthly mortgage payments, allowing more flexibility in monthly budgets.

The no monthly payment option comes with a caveat: the loan is declared due in full when the borrower dies or stops using the home as the primary residence.

FHA reverse mortgages offer lump-sum payouts, which can help pay to make home repairs, pay medical expenses, or manage other expenses. But there are some things to know about reverse mortgages before you commit:

• Gradual depletion of home equity: With each disbursement of reverse mortgage funds, your ownership stake decreases. This might only be a significant concern if you plan to leave your home as an inheritance. 
• If passing down your property is a priority, a reverse mortgage could change its value.
• Reverse mortgages tend to be more expensive than traditional mortgages.
• FHA loan rules require upfront mortgage insurance premiums and ongoing premiums based on the borrowed amount. 

Refinancing Benefits and Drawbacks

FHA cash-out refinancing, no-cash-out refinancing, and other options may be good alternatives to the FHA reverse mortgage. Depending on the needs and goals of the loan, refinancing may be a more budget-friendly solution for some borrowers.

Refinancing requires a monthly payment, mortgage insurance, and an appraisal may be needed. Before you commit:

• Unlike reverse mortgages, refinancing typically doesn't entail mandatory counseling sessions.
• Refinancing allows you to rebuild equity in the home over time.
• Refinancing doesn’t have to be an all-or-nothing option if you need money to renovate your home. Some FHA refinance options, such as Limited 203(k) rehab refinance loans, offer amounts lower than the full appraised value of the home for such purposes.

Refinancing offers more security when it comes to keeping the home. In the event of your passing or you need long-term care, your spouse may be at risk of losing the home with a reverse mortgage.

Why? The primary borrower must continue to use the home as the main address as a condition of the reverse mortgage (see above).

Making the Right Choice

The choice between a reverse mortgage and refinancing largely depends on the borrower's circumstances and financial goals. 

A reverse mortgage might be the right choice if your primary aim is to end monthly mortgage payments. However, if you value long-term cost-effectiveness, equity preservation, and spousal protection, refinancing is likely the more prudent path to prioritize.