A lot of our clients ask, which is better – a Reverse Mortgage or a Home Equity Line of Credit (HELOC)?
What’s the Difference?
Reverse Mortgage: A loan for seniors, age 62 and older, that is fully regulated and FHA insured to help protect the senior. HECM reverse mortgage loans are insured by the Federal Housing Administration and allow homeowners to convert their home equity into cash with no monthly mortgage payments.
Home Equity Line of Credit (HELOC): A line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans, such as credit cards. A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax deductible.
So Which Is Best?
With a HELOC, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. This means you can borrow against it again if you need to, and you can borrow as little or as much as you need throughout your draw period (typically 10 years) up to the credit limit you establish at closing.
To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe. Also, a lender generally looks at your credit score and history, employment history, monthly income and monthly debts, just as when you first got your mortgage.
A Reverse Mortgage uses a home’s equity as collateral for the loan with the amount of money the borrower receives being determined by the age of the youngest borrower, the interest rate on the loan, and the home’s appraised value. A portion of the funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM requirements. In addition, you may need to set aside additional funds from loan proceeds to pay for taxes and insurance if you are required to set up a LESA which is an impound account due to bad credit or a history of missing tax or mortgage payments in the past.
A reverse mortgage loan does not generally have to be repaid until 6 months after the last surviving homeowner moves out of the property or passes away and in most cases the borrowers’ heirs can request an extension. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the heirs receive any remaining equity. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage loan since the loan is insured.
You Decide…
Both have advantages and disadvantages. A Reverse Mortgage is a little more costly because FHA requires mortgage insurance, but it doesn't need to be repaid until you sell the home. A Home Equity Line of Credit keeps more money in your pocket, but requires regular monthly payments that retirees on a fixed income might find burdensome. And more often, many seniors do not qualify for a traditional mortgage or line of credit due to stricter underwriting guidelines.
Most seniors take out a reverse mortgage to help pay for home renovations, medical and daily living expenses as well as to buy smaller rental properties outright and or to downsize. Homeowners who have an existing mortgage often use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments. While a HELOC would result in additional monthly bills.
Want more information on a Reverse Mortgage or to find out if you qualify, call us at (805) 738-8326 or click here to email us directly.
Article by: Stephanie Duenas
Written: 8/9/2019
A division of The Underwood Group BRE # 01396133 | NMLS # 344822 Disclaimer