Home refinancing involves a forward loan, while reverse mortgage loans are categorized as home equity conversion mortgages. Both methods offer financial payouts based on a home’s equity, but understanding the disparities between refinancing and reverse mortgages is crucial.
As per the U.S. Department of Housing and Urban Development (HUD) website, a reverse mortgage is a specialized home loan allowing a homeowner to convert a portion of their home equity into cash. On the other hand, home loan refinancing is the process of replacing the homeowner’s existing mortgage with a new one, often for purposes such as accessing cash from equity, consolidating debts, or covering medical bills.
Although both reverse mortgages and home loan refinancing enable homeowners to cash out on home equity, significant differences exist. Refinancing and second mortgages typically necessitate a reasonably low debt-to-income ratio, combined with an assessment of home equity and consideration of credit scores to determine eligibility and borrowing limits. In contrast, a reverse mortgage imposes no income requirements, making it available irrespective of current income.
The borrowing amount with a reverse mortgage depends on factors such as age, prevailing interest rates, and the appraised value of the home or FHA’s mortgage limits for the area, choosing the lesser of the two. Learn more about FHA’s new HECM loan program.
Another notable distinction is that with mortgage refinancing and equity loans, repayment is mandatory. In contrast, a reverse mortgage does not require regular payments as long as the property remains the principal residence. Homeowners only need to continue covering real estate taxes, utility bills, and other expenses. Moreover, unlike refinanced or second mortgages, missing payments doesn’t lead to foreclosure or eviction. Repayment for a reverse mortgage only becomes due when selling the home or no longer using it as the primary residence. At this point, the homeowner or their estate must repay the reverse mortgage, with any remaining equity going to the homeowner or heirs. Importantly, other assets remain unaffected, and the debt is not passed on to the estate or heirs.
For these reasons and more, reverse mortgages stand out as a preferred option among senior home loans. It’s worth noting that HUD offers FHA-insured reverse mortgages, and individuals can contact 1-800-569-4287, toll-free, for information on HUD-approved housing counseling agencies to address queries about FHA-insured HUD reverse mortgages. —Authored by Maria Ny