Reverse Mortgage vs. Cash-Out Refinance vs. Second Mortgage: Which is Right for You?
When it comes to finding extra money in retirement, homeowners have several options to choose from. One option is to take out a reverse mortgage, which allows you to tap into the equity in your home without having to make monthly payments. Another option is to get a cash-out refinance, which allows you to refinance your mortgage and take out a lump sum of cash. Or, you could get a second mortgage, which is a loan that’s secured by your home equity.
So, which one of these options is right for you? It depends on your needs and your financial situation. Here are some things to consider when deciding which route to take:
1. How much money do you need?
If you need a large sum of money, then a reverse mortgage or cash-out refinance might be a better option than a second mortgage. With a reverse mortgage, you can borrow up to 55% of the value of your home. And with a cash-out refinance, you can usually borrow up to 85% of your home’s value (depending on your loan-to-value ratio).
2. How long do you need the money for?
If you need the money for a short-term expense, then a second mortgage might be the best option. That’s because second mortgages typically have shorter terms than reverse mortgages or cash-out refinances. For example, a home equity line of credit (HELOC) has a term of 10 years, while a cash-out refinance typically has a term of 30 years.
3. What are the interest rates?
Interest rates are important to consider because they will affect how much money you end up paying back. In general, second mortgages have higher interest rates than either reverse mortgages or cash-out refinances. That’s because second mortgages are considered more risky than other types of loans. However, the interest rate on your second mortgage will depend on your credit score and other factors.
4. What are the fees?
All loans come with fees, such as origination fees, appraisal fees, and closing costs. These fees can add up, so it’s important to compare the costs of each loan before making a decision. In general, cash-out refinances tend to have higher fees than either reverse mortgages or second mortgages.
5. What are the risks?
Before taking out any type of loan, it’s important to understand the risks involved. With a reverse mortgage, the biggest risk is that you could owe more money than your home is worth when the loan comes due. With a cash-out refinance, the biggest risk is that you could end up in foreclosure if you can’t make your monthly payments. And with a second mortgage, the biggest risk is that you could lose your home if you can’t make the payments.
6. What are the tax implications?
Another thing to consider is the tax implications of each loan type. With a reverse mortgage, you generally don’t have to pay any taxes on the money you borrow. But with a cash-out refinance or second mortgage, you may have to pay taxes on the money you borrow if it exceeds the amount of your mortgage interest deduction. Consult with a tax advisor to see how each loan would affect your taxes.
7. What are your other options?
Before taking out any type of loan, it’s important to explore all of your options. In addition to reverse mortgages, cash-out refinances, and second mortgages, there are other ways to get extra money in retirement, such as downsizing your home or taking out a personal loan. Talk with a financial advisor to explore all of your options and find the best solution for your needs.