Money.com: 4 alternatives to cash-out refinancing, including the reverse mortgage
For older Americans looking to access additional cash, one potential option is a cash refinance transaction that can help provide a new, potentially lower mortgage rate while also providing an additional lump sum. However, not all retirees could benefit from the terms of such a transaction, and that is why it is worth exploring some alternatives.
One of those alternatives is a reverse mortgage, according to a column on cash refinancing transactions published by Money.com.
One of the reasons that a senior may want to consider alternatives to a cashback is due to their qualification requirements. A minimum credit score of 620 is required to complete such a transaction, but better terms will be given to those with a higher credit score, the column says. It also requires a debt-to-income ratio of 50% and a maximum loan-to-value ratio of 80% requiring the borrower to have at least 20% equity in their home.
“Lenders will require payment documents, proof of income and a recent home appraisal (within the past 90 days),” the column read. “Before considering mortgage refinancing of any kind, homeowners must make at least 6 consecutive payments on their original loan. To get cash refinance on an FHA loan, homeowners must reside in the home for at least 12 months.
If any of these qualifying requirements are problematic for a person’s individual situation, then it might be worth exploring other options, including a reverse mortgage, the column says.
“Available for homeowners 62 or older, a reverse mortgage also uses equity to pay the homeowner cash,” the column states. “However, due to the parameters set by the government, a reverse mortgage does not require the owner to repay the amount before a specific period.”
Other details that the column does not mention include the non-recourse feature, which means the debt can never exceed the value of the home and regular monthly payments are not required. Still, for those who wish to bequeath their home to an heir, there are things a borrower should be aware of, he says.
“[Y]You return your interest in the house to the lender in exchange for money, and all heirs to the property will have to repay the loan if they want to keep the house, ”the column read.
Additional alternatives to a withdrawal refi may include a home equity loan; a personal loan; or a Home Equity Line of Credit (HELOC). Home equity loans and HELOCs will create a new monthly payment obligation, although a withdrawal refi may lead to more favorable mortgage terms.
Each product has different advantages and disadvantages and should be decided in consultation with trusted finance professionals and advisors, including friends and / or family members.
Read it column on Money.com.