Refinance Mortgage Vs Home Equity Loan – If you’re a homeowner and at least 62 years old, you may be able to convert your home equity into cash to pay for living expenses, health care expenses, home remodeling, or whatever else you need. This option is a reverse mortgage; However, homeowners have other options, including home equity loans and home equity loans (HELOCs).
All three allow you to tap into your home equity without having to sell or move out of your home. These are different loan products, but it pays to understand your options so you can decide which one is best for you.
Refinance Mortgage Vs Home Equity Loan
A reverse mortgage works differently than a forward mortgage—instead of making payments to the lender, the lender makes payments to you based on a percentage of your home’s value. Over time, your debt grows—as payments are made to you and interest accrues—and your equity decreases as the lender buys more and more of it.
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You continue to hold title to your home, but as soon as you move out of the home for more than a year (even involuntarily for a hospital or nursing home stay), sell it, or die—or become delinquent on your property taxes or fall into insurance or home repairs—the loan remains outstanding. The lender sells the home to recover the money (plus fees) paid to you. Any equity left in the home goes to you or your heirs.
Carefully study the types of reverse mortgages and make sure you choose the one that works best for your needs. Check the fine print with a lawyer or tax advisor before you sign. Reverse mortgage scams that seek to steal your home equity often target older adults. The FBI recommends not responding to unsolicited ads, being suspicious of people who say they can offer you a free home, and not accepting payments from people for a home you didn’t buy.
Note that if both spouses have their names on the mortgage, the bank can’t sell the home until the surviving spouse dies — or the tax, repair, insurance, moving, or home-sale situations listed above occur. Couples should carefully investigate the surviving spouse issue before agreeing to a reverse mortgage.
There may be other drawbacks, including high closing costs and the possibility that your children may not inherit the family home if the loan cannot be repaid. Interest charged on a reverse mortgage usually accumulates until the mortgage is terminated.
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Mortgage loan discrimination is illegal. If you believe you have been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is the Consumer Financial Protection Bureau or the U.S. Submitting a report to the Department of Housing and Urban Development (HUD).
Like a reverse mortgage, a home equity loan allows you to convert your home equity into cash. It works just like your primary mortgage—in fact, a home equity loan is also known as a second mortgage. You receive the loan as a lump sum payment and make regular payments to pay off the principal and interest, which is usually a fixed rate. Unlike a reverse mortgage, you don’t have to be 62 to get one, and you have to start paying off the loan shortly after taking it out.
With a home equity line of credit (HELOC), you have the option to borrow up to the approved credit limit on an as-needed basis. In that respect, a HELOC acts more like a credit card.
With a standard home equity loan, you pay interest on the entire loan amount, but with a HELOC, you only pay interest on the money you actually withdraw.
Things To Know About Equity In The Home
A fixed interest rate on a home equity loan means you always know what your payment will be, while a variable rate on a HELOC means the payment amount varies.
Currently, the interest you pay on home equity loans and HELOCs is not tax deductible unless you use the funds for home renovations or similar activities at the residence that secure the loans. Before the Tax Cuts and Jobs Act of 2017, interest on a home equity loan was all or partially tax deductible. Note that this change applies to tax years 2018 to 2025.
Additionally—and this is an important reason to make this choice—with a home equity loan and HELOC, your home remains an asset to you and your heirs. However, it’s important to note that your home serves as collateral, so you risk losing your home to foreclosure if you default on the loan.
Reverse mortgages, home equity loans and HELOCs allow you to turn your home equity into cash. However, they vary in terms of delivery and repayment requirements, such as age, equity, credit and income. Based on these factors, here are the key differences between the three types of loans.
What Is A Home Equity Loan?
Reverse mortgages, home equity loans and HELOCs allow you to turn your home equity into cash. So how do you decide which type of loan is right for you?
Generally, a reverse mortgage is considered a good option if you are looking for a long-term source of income and don’t mind your home becoming part of your estate. However, if you are married, make sure the rights of the surviving spouse are clear.
A home equity loan or HELOC is considered a good option if you need short-term cash, are able to make monthly repayments, and prefer to keep your home for your heirs. Both have considerable risks along with their benefits, so thoroughly review the options before taking action.
HELOCs and home equity loans typically have little or no fees and little or no closing costs compared to reverse mortgages. Reverse mortgages have mandatory negotiation periods and generally have higher closing costs than conventional mortgages.
The Different Types Of Home Equity Loans
A reverse mortgage takes longer to process with mandatory negotiation sessions, closing disclosures, etc. A HELOC usually processes a little faster than a home equity loan, with many lenders advertising closing times of less than 10 days. In comparison, most home equity lenders advertise processing times of two to six weeks.
Both home equity loans and HELOCs have credit and income requirements for approval. Good credit is not required to get approved for reverse mortgages, but you must prove your ability to maintain the property and pay your tax and insurance bills. If you can’t prove these enough to get approved for a standard reverse mortgage, you may be able to get a single-purpose reverse mortgage through a local nonprofit or government agency.
Reverse mortgages, HELOCs and home equity loans have their place. If you need cash temporarily, have the income and credit to get approved, and want to leave your home to your heirs, a home equity loan, or HELOC, is a great option for you. If you are already retired and need to supplement your income, are not ready to downsize and don’t want to leave your home to your heirs, a reverse mortgage is a great option for you.
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By clicking “Accept All Cookies”, you consent to the storage of cookies on your device to enhance site navigation, analyze site usage and assist in our marketing efforts. A cash-out refinance pays off your old mortgage in lieu of a new mortgage, ideally at a lower interest rate. A home equity loan gives you money as a separate loan with separate payment dates in exchange for the equity you have built up in your property.
A cash-out refinance is a mortgage refinancing option in which the old mortgage is replaced with a new one that offers a higher amount than the previously existing loan, helping borrowers get some money off their home mortgage.
Compared to a rate-and-term refinance, you typically pay a higher interest rate or higher points on a cash-out refinance mortgage, where the mortgage amount remains the same.
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Based on bank criteria, your property’s loan-to-value ratio and your credit profile, the lender will determine how much money you can get with a cash-out refinance. The lender will also assess the previous loan terms, the balance required to pay off the previous loan and your credit profile.
The lender then makes an offer based on the insurance analysis. The borrower gets a new loan that pays off their previous loan and locks them into a new monthly installment plan for the future.
The primary benefit of a cash-out refinance is that the borrower can realize the value of some of his assets.
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