Contrasting Reverse Mortgages vs. Equity Sharing Agreements vs. Cash-Out Refinance
Reverse Mortgage vs. Equity Sharing Agreement vs. Getting a Cash-Out Refinance: What to Consider
When it comes to senior homeowners looking to access the equity in their home, there are a few different options available. Two of the most popular options are reverse mortgages and equity sharing agreements. Another option is to get a cash-out refinance.
Each option has its own set of pros and cons that should be considered before making a decision. In this article, we'll take a closer look at each option and some of the things you should keep in mind when deciding which one is right for you.
Reverse Mortgage
A reverse mortgage is a loan that allows senior homeowners to access the equity in their home without having to make monthly payments. The loan is repaid when the home is sold.
Pros:
• No monthly payments are required, which can free up cash flow.
• The loan does not have to be repaid until the home is sold.
• The interest rate on a reverse mortgage is typically lower than the interest rate on a traditional mortgage.
Cons:
• Fees associated with a reverse mortgage can be expensive.
• The loan balance can increase over time if the value of the home increases, which could reduce the amount of money available to the heirs when the home is sold.
• Reverse mortgages are not available to all senior homeowners. To qualify, you must be at least 62 years old and have significant equity in your home.
Equity Sharing Agreement
An equity sharing agreement is a contract between a senior homeowner and another party, such as a family member or an investor. Under the agreement, the senior homeowner agrees to sell a portion of their equity in the home to the other party in exchange for a lump sum of cash or regular payments. When the home is sold, the other party is entitled to a portion of the proceeds.
Pros:
• An equity sharing agreement can provide a senior homeowner with a lump sum of cash or regular payments.
• The terms of the agreement can be customized to meet the needs of the senior homeowner.
• The agreement can be structured so that the other party is not entitled to any proceeds from the sale of the home if the senior homeowner lives in the home for a certain period of time, such as 10 years.
Cons:
• An equity sharing agreement can be complex and may require the assistance of a lawyer or financial advisor to draft and negotiate the terms.
• There is no guarantee that the other party will fulfill their obligations under the agreement.
• The senior homeowner may be required to pay taxes on the income received from the sale of their equity in the home.
Cash-Out Refinance
A cash-out refinance is a new mortgage loan that is larger than the balance owed on the existing mortgage loan. The difference between the two loan amounts is paid to the senior homeowner in cash. The senior homeowner then uses this cash to pay off their existing mortgage loan and any other debts, such as credit cards or personal loans.
Pros:
• A cash-out refinance can provide a senior homeowner with a lump sum of cash that can be used to pay off debts or make home improvements.
• The interest rate on a cash-out refinance is usually lower than the interest rates on other types of loans, such as credit cards or personal loans.
• A cash-out refinance can be used to consolidate multiple debts into one monthly payment.
Cons:
• A cash-out refinance will result in a higher monthly mortgage payment.
• The senior homeowner will have to pay closing costs on the new loan.
• The loan balance on the new mortgage loan will be higher than the balance on the existing mortgage loan, which could result in a larger loan balance being owed when the home is sold.
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