If you’re retired, you may be fortunate enough to own your home outright or be close to paying off your mortgage. Thus, your home equity can be a significant source of retirement funds.
Two popular ways for retirees to tap into this equity are cash out refinances and reverse mortgages.
Each has its benefits and drawbacks, making them suitable for different retirees. Below, we’ll explore each home lending product to help you make the right choice.
A cash out refinance from Discover® Home Loans or another home lender is a type of loan you use to pay off your existing mortgage while tapping your equity. To do this, the refinancing loan is larger than your current mortgage — and you pocket the difference as cash.
For instance, you might take out a $150,000 cash out refinance loan to pay off a $100,000 mortgage balance. The $50,000 difference is yours to keep.
Here are some advantages of getting a cash out refinance when you retire:
Keep these drawbacks in mind when considering a cash out refinance:
A reverse mortgage is a special type of lending product available to homeowners aged 62 and over who own or nearly own their homes free and clear.
As the name implies, the lender sends you money in exchange for your equity, and it doesn’t count as taxable income. You can take this money as a lump sum, annuity, or line of credit.
You are not required to make any set monthly payments. However, if you fail to keep up on insurance/property taxes or sell the home, the entire balance of the reverse mortgage may become due.
If you die, and your spouse is classified as an eligible non-borrowing spouse, they may be able to continue living in the home. Otherwise, your heirs must pay off the reverse mortgage balance.
Reverse mortgages do have some downsides to know about:
Cash out refinance loans can be a great product for homeowners who are still in the workforce nearing retirement or retiring early and looking to maximize the value of their home — deciding whether to sell it or pass it down.
On the other hand, a reverse mortgage may work better for retirees who have valuable homes that they plan to use as primary residences, and which aren’t a significant portion of their estate planning. They also work well for retirees with credit scores that are too low to qualify for the best cash out refinance rates.
All that said, there are a lot of nuances to know about each lending product. It’s important you spend time shopping around and consulting a financial professional if you have questions.
Please note: Discover Home Loans offers home equity loan and mortgage refinance products but does not offer reverse mortgages.
Discover Home Loans provides home equity loans and mortgage refinance options with a range of benefits for qualified homeowners. Find options that fit within your budget at discover.com/home-loans. © 2023 Discover Bank, Member FDIC | NMLS ID 684042