Reverse mortgage or a cash-out refinance — how do you choose?

The most basic difference: one is approved on income, the other on age and the property

A cash-out refinance is, at its core, your existing mortgage re-priced and merged into one new, larger loan — just like a purchase mortgage, your income has to clear the stress test before a lender will approve it. Income proof, credit report authorization — none of that paperwork goes away.

A reverse mortgage works differently: your age (you and every co-owner on title must be 55 or older), the property's location, and its appraised value are the main things that decide whether — and how much — you're approved for. Income and credit score aren't a key qualifying factor. That's the whole point of the product: it gives people whose income can't clear a stress test, but who have real equity in their home, another way in.

Whether you make monthly payments decides if the balance goes down or up

With a cash-out refinance, you make monthly payments of principal and interest just like any regular mortgage once the money's in your hands — pay on time, and the balance goes down year over year.

A reverse mortgage doesn't require monthly payments — interest compounds and gets added to the principal, so the balance only grows, it doesn't shrink on its own. Neither design is a flaw; they're two different trade-offs: one trades your current cash flow for a smaller balance later, the other trades no required payments for a larger balance later.

The cash you can access is capped differently too

A cash-out refinance is generally capped at 80% of your home's appraised value, minus what you still owe. A reverse mortgage is generally capped around 55% of appraised value, and that percentage itself moves with your age, the property, and its location — the older you are, the higher the percentage you can usually access.

Both require paying off any existing mortgage or HELOC first — what's left after that is the cash you actually get. The exact number for either one only comes from running your specific appraisal and balance through the math.

The interest rate is usually different too

A reverse mortgage's rate typically runs higher than a cash-out refinance or a regular mortgage. That's not any one lender pricing it arbitrarily — a reverse mortgage doesn't require monthly payments, so the lender has to wait until the home is eventually sold or settled to recover principal and interest. Not knowing when that money comes back is a real risk, and it shows up in the price.

That's also why, if your income can carry a monthly payment and clears the stress test, a cash-out refinance usually works out cheaper over the long run than a reverse mortgage.

So which one do you pick

If your income clears the stress test and you can comfortably handle a monthly payment, a cash-out refinance is usually the cheaper option and worth trying first.

If the income side is what's actually blocking you — commonly the case for someone already retired, on modest income, but with real equity built up — a reverse mortgage exists specifically to solve that problem: it's approved on your age and your property, not on whether you can find room in your monthly budget. Which one actually fits you comes down to your own income picture and how comfortable you are with a balance that grows over time. For a fuller walkthrough of how a reverse mortgage itself works, see Reverse Mortgage in Vancouver: Stay in the House, Take the Money Out. If you just want to know how much a cash-out refinance can get you, see how much can you actually pull out when you refinance.

Common questions

If I qualify for both, is a cash-out refinance always the better deal?

If you can comfortably handle the monthly payment, a cash-out refinance usually does work out cheaper over time. But "better deal" isn't only about cost — some people choose a reverse mortgage anyway because they'd rather not have a required monthly payment and want to keep that cash flow flexible, even when they qualify for both. It's a trade-off, not a right-or-wrong answer.

If I take a reverse mortgage, can I still do a cash-out refinance later?

There's no rule against it, but the reverse mortgage balance counts as an existing debt on the property, and any new financing would need to pay that balance off first — the same as with any prior loan. Whether it's actually possible, and for how much, depends on how much equity is left by then.

Can I do both at the same time and get two lump sums?

Not on the same property at the same time. A reverse mortgage typically requires paying off any existing mortgage or HELOC on the property before it funds — the two are sequential, not parallel.

Does a reverse mortgage really not look at income at all?

It's true that income and credit score aren't a key qualifying factor. That doesn't mean there are no other requirements, though — the property has to be your primary residence, and property taxes and home insurance have to stay current. If those conditions lapse, protections built into the product (like the negative equity guarantee) can lapse too.

I'm under 55 — does that mean a cash-out refinance is my only option?

Age is a hard cutoff for a reverse mortgage — you and every co-owner on title must be 55 or older, no exceptions. A cash-out refinance has no age floor, but it's still approved based on clearing the stress test, not on age.

About the author: I'm Morning Lee, a licensed mortgage broker with Dominion Lending Centres - A Better Way and a licensed realtor with Royal Pacific Realty (Kingsway) Ltd., in Greater Vancouver. I started my first business while still in university, and have run several since — computer parts, moving, logistics, and more — before moving into real estate and mortgages. Over thirty years, it's all been variations on the same thing. The read above comes from that same experience. I work in English and Mandarin; happy to talk through your situation.