What is the Difference Between Refinancing and a Reverse Mortgage

by Barry Waxler
There are several different ways to get monetary payments based on your home's equity - but what is the difference between refinancing and reverse mortgage, two of the most popular?

Refinancing your home, essentially getting a second mortgage, has been a popular option for decades. Homeowners who want to get money in a lump sum, based on the equity of their home (their home's value minus the amount owed on their first mortgage), often choose to refinance. This allows them to get a second loan on their home, and requires that the loan be paid back, along with the original mortgage, or instead of the original mortgage (depending on the terms of your second mortgage).

So, what is the difference between refinancing and reverse mortgage? Reverse mortgages do not require that you take out a second loan on the equity of your home. Instead, you can actually get payments based on that equity, and you are not required to pay back the reverse mortgage until you either pass away or move out of your home for good. These payments (which can also be used as a line of credit, with unscheduled payments) are tax free and can actually be used as income for living.

Another difference with a reverse mortgage is the age requirement. People who apply for a reverse mortgage must be at least 62 years old or older, and payments may be based on this - along with the value of your home and current interest rates. This means that you can't be turned down for a reverse mortgage because of bad credit or your debt to equity ratio. You also can't lose your home if you outlive your loan - as long as you use the home as your residence, you can't be evicted, as you do not owe more than your home is worth.

There are some negative aspects associated with both refinancing and reverse mortgages. The cost of both is high, just in different ways. The interest rate encountered when paying back a second mortgage can be very elevated, costing you a lot of money in the long run. Reverse mortgages can also cost money - fees for the broker when getting your reverse mortgage, as well as interest due from your beneficiaries when you pass on or leave your residence.

What is the difference between refinancing and reverse mortgage? There are several differences, considering the fundamental way they work, so being sure to research and choose the right one for you is key.
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