Reverse Mortgage Vs HELOC
Are you 62 or older and have you recently considered accessing the equity in your home? Perhaps you would like to make some home improvements, or maybe you have some bills and the extra money could help alleviate the burden. Home equity continues to be the biggest asset Americans own. Lets 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) .
A reverse mortgage is a financial facility 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 or homeowners 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
- Tax free cash and a home for life, with no monthly mortgage payments.
- 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 any purpose such as repairs to the house, a new car, a holiday or as a supplement to your income.
- No monthly mortgage payments on the loan while you live there.
- Although the loan is usually taken as a lump sum, you have the options of a line of credit, monthly income payments or a combination of any of the above.
- If spouse is under age 62, they can live in the home for the rest of their life also (if they so choose).
- Only one spouse is required to be 62 or older.
- The loan rate is sometimes higher than the conventional 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 wcould be 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 less 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 do so at any time.
- One borrower must be at least 62 years old to qualify.
Home Equity Line of Credit (HELOC)
Whereas 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
- Potential for lower interest rate in comparison to a Reverse Mortgage loan.
- There are no age restrictions apply
- Minimul income restrictions
- Standard loan closing cost and monthly payments
- The primary disadvantage to HELOCs is the increased risk from rising interest rates.
- You must make monthly payments. If you fall behind, you could lose your home.
- HELOCs are ARMs in essence. However, HELOCs don't have the usual maximum 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.