Deciding Between Cash-Out Refinance vs. Reverse Mortgages vs. Equity Sharing Agreements

Though all three options will allow you to access the equity in your home, there are significant differences between a cash-out refinance, a reverse mortgage, and an equity sharing agreement. Before making a decision, it’s important to understand the pros and cons of each option, as well as the eligibility requirements.

A cash-out refinance allows you to take out a new mortgage loan for more than you owe on your current home loan and receive the difference in cash. This option can be beneficial if you need to access a large sum of cash, you want to consolidate other debts, or you plan to stay in your home for the long haul and want to lower your monthly payments by refinancing into a loan with a lower interest rate. However, a cash-out refinance is not right for everyone. You will need to have good credit and enough equity in your home to qualify, and you will need to be prepared to pay closing costs, which can be 2% to 5% of the loan amount.

A reverse mortgage is a loan that allows homeowners 62 years or older to access the equity in their home without having to make monthly payments. The loan is repaid when the borrower sells the home or dies. Reverse mortgages can be a good option for seniors who want to stay in their home and have a steady source of income, but they do have some drawbacks. The loan balance can grow quickly if the borrower doesn’t stay on top of property taxes and insurance, and if the home value decreases, the borrower may end up owing more than the home is worth.

An equity sharing agreement is an arrangement between two parties, usually a homeowner and an investor, in which the investor provides the capital for the purchase of a property and the homeowner agrees to share the equity with the investor when the property is sold. This option can be beneficial if the homeowner doesn’t have the cash for a down payment or if they are not able to qualify for a traditional mortgage. However, it’s important to carefully read and understand the agreement before signing, as it will dictate the terms of the sale and how the proceeds will be divided.

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