Refinancing beats reverse mortgage option

If you're a senior citizen, own a home and need money, should you get a reverse mortgage or refinance instead?

In general, a reverse mortgage converts home equity into cash in several different ways, ranging from monthly payments to an equity line to one-time payouts — or a combination.

The amount you can borrow varies according to your age, the value of the home, current interest rates and loan fees.

Zoran Basich, an elder-law attorney and operator of Nursing Home Solutions, a California-based company, believes seniors should consider borrowing against the value of their homes only as a last resort.

If there's no way around it, he says it's smarter to refinance as a 30-year fixed loan than get a reverse mortgage.

Here's how that would work: You own a home valued at $300,000. You find yourself in need of a large amount of cash for major home repairs and want a lump sum in the bank for future emergencies.

You borrow a combination of cash and up-front costs (rolled into the loan) valued at $100,000 at 6 percent. Exclusive of taxes and insurance, you'd be paying back a little under $600 per month on a 30-year loan. And you wouldn't need mortgage insurance because you still have plenty of unencumbered equity.

The rub here is the monthly payments. However, Basich contends that the fees for this type of loan are lower, and your remaining equity isn't subject to interest and other costs associated with a reverse mortgage.

True, in a conventional mortgage , the money must be paid back starting right after closing, while reverse mortgages don't fall due until the home is vacated. But, Basich argues, since the payments on a conventional mortgage are stretched out over a longer period of time, they're lower and more manageable.

In the case of a reverse mortgage , younger borrowers can't cash out as much equity as older borrowers. To qualify for a reverse mortgage, you must be at least 62 years old. Since banks are repaid when the house is sold, it's quite possible a lender might have to carry the note for 20 to 25 years or more. For that reason, a 79-year-old is a much more attractive loan candidate from the bank's perspective.

As for borrowers, whether they live six months or 30 years after the loan is closed, they still pay stiff front fees up front. Of course, statistically speaking, older borrowers are less likely to accumulate as much interest as younger ones.

— Carole Moore, Bankrate.com