With mortgage rates at record lows, many borrowers have moved to refinance their mortgages. Some have even refinanced multiple times over the last few years. Given that closing costs (for all mortgages) are rising and that refinancing often extends the duration of one’s mortgage, it might ultimately be more economical to obtain a reverse mortgage.

Consider that a refinancing could cost you 3-5% of the value of your home. Whether the fees are paid up-front or rolled into the loan balance, a refinancing is expensive. Of course, the idea is that you will reduce your monthly payment and/or save money in interest charges over the life of the loan, and you would be foolish to refinance unless you could achieve at least one of these outcomes.

If you are already retired and/or eligible for a reverse mortgage, why not re-apply the cash that you would have to pay upfront for a refinancing towards obtaining a reverse mortgage instead. Surprisingly (given that reverse mortgages are often lambasted for their high costs), the cost of obtaining a reverse mortgage may in fact be cheaper than going through the process of refinancing. For example, the recently introduced Home Equity Conversion Mortgage (HECM) Saver eliminated the upfront FHA insurance premium, which was the largest upfront cost for most reverse mortgage borrowers. As if that weren’t enough, many lenders offer additional financial incentives to borrowers, such as no-closing cost loans.

In addition, while reverse mortgage rates aren’t as low as mortgage rates (due to an FHA rate floor), there is a good chance that they are lower than the interest rate attached to your current mortgage, especially if you are contemplating a refinance. Not only that, but the nature of reverse mortgages is such that the flow of funds will be reversed. Instead of making a (smaller) mortgage payment every month, you will receive a (relative to when interest rates were higher) larger one. The two main offsets to savings are the annual insurance premiums and the fact that your reverse mortgage negatively amortizes, meaning the balance will increase over time.

On some level, it’s ridiculous to compare a reverse mortgage with a refinanced mortgage, since the two are fundamentally different. At the same time, the decision behind both stems from a common motivation to save money on one’s mortgage. In short, the greatest savings can probably be achieved by refinancing, but you can reshape your financial situation, alter your monthly income stream, and eliminate the burden of monthly payments altogether by instead obtaining a reverse mortgage.

Be sure to read my complete overview of the financial and non-financial pros and cons of reverse mortgages for more guidance on making this decision.

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