Reverse Mortgage Vs HELOC
Perhaps you need to do some deferred maintenance or make some home improvements, or maybe you have some bills and some extra money could help alleviate the burden. Home equity continues to be the biggest asset Americans own.
Let's look at the two main types of home equity options available for seniors 62 and older, a Reverse Mortgage and Home Equity Line of Credit (HELOC) .
Reverse Mortgage
A reverse mortgage is a financial tool available to seniors aged 62 years or older. Reverse mortgage can be taken out as a line of credit, lump sum or monthly payments. A reverse mortgage requires no payments to be made to the lender until the homeowner(s) pass away, move, or sell the home. The loan is repaid with the proceeds from the home sale or by refinancing the loan.
Advantages of reverse mortgage
- You can continue to live in your own home for the rest of your life (if you opt to)
- You'll have cash to improve your life style or for another purpose such as repairs to the house, a new car, a holiday or as a supplement to your income.
- No repayments on the loan while you live in the home.
- Although the loan is usually taken as a lump sum, you have the option of line of credit, monthly payments or a combination of any of the above.
Disadvantages
- The loan rate is often higher than the standard home loan rate.
- Fees and interest charged on the loan (compound interest) will accrue throughout the term of the loan.
- The value of your estate will be considerably reduced for those who will inherit your estate.
- If you relocate (either by choice or necessity) the loan must be repaid at that time. This could limit your options, as you may be left with limited money after the sale of your house.
- If you are the sole owner of the house and you relocate or die, anyone else who lives with you may not be able to stay in the home.
- If you want to repay the entire loan early you may have to pay an early termination fee. These fees can be considerable.
- The borrower must be at least 62 years old to qualify.
Home Equity Line of Credit (HELOC)
A Home Equity Loan/HELOC is a conventional mortgage product that allows a homeowner to borrow money by securing the loan against the home. The homeowner makes monthly payments to repay the money borrowed in a home equity loan. The property is used as collateral in the event that the homeowner fails to repay the loan.
Advantages of a HELOC
- Lower interest rate in comparison to a Reverse Mortgage loan
- Interest rates on HELOCS are adjustable.
- There are no age restrictions apply
- No income restrictions
- Just a standard loan closing cost and monthly payments
Disadvantages
- The primary disadvantage to HELOCs is that due to their adjustable nature, there is increased risk from rising interest rates.
- HELOCs are ARMs in essence. However, HELOCs don't have the usual adjustment cap. And while an ARM lifetime cap may carry 5 or 6 percent over the original rate, a HELOC may reach 18 percent if rates are inflating.
- Another of the major disadvantages of HELOC loans is that you are putting your home up as collateral. This creates a level of vulnerability that does not exist with most loans. Simply put, if you default on the loan, you can lose your house.
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