For older Americans who are looking to access additional cash, one potential option is a cash-out refinance transaction that can help provide a new, potentially lower mortgage rate while also providing an additional lump sum of cash. However, not every retiree could find themselves benefiting from the terms of such a transaction, and that’s why it’s worth exploring some alternatives.
One of these alternatives is a reverse mortgage, according to a column about cash-out refinance transactions published by Money.com.
One of the reasons a senior may want to look at alternatives to a cash-out refi is due to their qualification requirements. A minimum credit score of 620 is required to enter into such a transaction, but better terms will be granted to those who have higher credit scores, 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 his or her home.
“Lenders will require payment documentation, evidence of income, and a recent home appraisal (within the last 90 days),” the column reads. “Before considering a mortgage refinance of any kind, homeowners must make at least 6 consecutive payments to their original loan. To get a cash-out refinance on an FHA loan homeowners need to reside in the home for a minimum of 12 months.”
If any of those qualification requirements cause problems for a person’s individual situation, then it could be worth exploring alternative options including a reverse mortgage, the column reads.
“Available for homeowners who are 62-years or older, a reverse mortgage also uses the equity to pay cash to the homeowner,” the column says. “However, because of government-set parameters, a reverse mortgage does not require the homeowner to pay back the amount before any specific period.”
Other details that the column does not mention include the non-recourse feature meaning that the debt can never exceed the value of the home, and regular monthly payments are not required. Still, for those who may wish to leave their home to an heir, there are things a borrower should be aware of, it says.
“[Y]ou’re giving back your stake in the home to the lender in return for cash, and any heirs to the property will need to pay the loan back if they want to keep the home,” the column reads.
Additional alternatives to a cash-out refi can 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, though a cash-out refi could lead to more beneficial mortgage terms.
Each product comes with different advantages and disadvantages, and should be decided in consultation with financial professionals and trusted advisors, including friends and/or family members.
Read the column at Money.com.