Wednesday, September 12, 2012

Reverse Mortgage vs. Home Equity Line

Reverse Mortgage vs a HELOCOne of the biggest reverse mortgages myths are that they are very expensive.  While they do have fees associated with them that are often misunderstood (and a lot lower than they used to be), many financial and estate planners still recommend their senior clients look at a home equity line of credit over a reverse mortgage.  This brings up the debate, which is better...a HECM or a HELOC?

The HELOC stands for home equity line of credit and is available at almost any bank with relatively low fees.  In some cases you can borrow up to 100% of the value of your home using a HELOC and you only pay interest on the money you use.  This sounds good to most people, but there are some other things to know.  Most home equity lines of credit have adjustable rates tied to the prime rate.  This has not been much of an issue the past few years, but once the economy starts to recover the Fed will have to start raising interest rates which directly affect the prime rate.  This rate can change monthly which means your payment can change monthly.  HELOC's also have a monthly payment associated with them that must be paid or else the bank will foreclose.  You also have to show income, assets and a good credit score in order to qualify for a home equity line of credit.

The HECM stands for home equity conversion mortgage or reverse mortgage.  The reverse mortgage is not as radially available as the HELOC, meaning not all banks offer them.  The closing costs for a reverse mortgage are higher than a home equity line as well and depending on your age you can borrow between 62 and 78% of the value of your home.  To get a HECM loan though you do not have to have high income, lots of assets, or good credit to qualify, you just have to be 62 or older and have enough equity in your house.  With the reverse mortgage you have no monthly payment due while you live in your home and the only way to be foreclosed on is if you fail to pay your property taxes and insurance.  The reverse mortgage has a variable rate option with rates comparable to home equity lines of credit as well as a fixed rate loan.

So which is better?  That depends on your situation.  If you have a short term need for some money that you will be able to pay off quickly then the home equity line of credit is probably your best choice.  Or if you do not plan to stay in your home much longer, meaning less than 2-3 years then the HELOC is what you should consider.  On the other hand, if you are on a fixed income and are planning to stay in your home, you should seriously look into the reverse mortgage.  With a fixed income it would probably be harder to take on another payment, especially one that has the potential of changing all the time.  When you have a reverse mortgage once you have the loan, it cannot be taken away.  The HELOC on the other hand can be closed by the bank if they feel you are a potential credit risk, even after the line has been open and even if you are current on your payments!

The reverse mortgage is not for everyone, but if you are looking into taking out a home equity line of credit on your home, before you do so, do some research on the reverse mortgage.  You may be surprised at what you find.

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