Reverse Mortgage vs Traditional HELOC
Senior homeowners in need of either a lump sum of cash, or a little extra each month to help make ends meet often consider both a HELOC (home equity line of credit) and a reverse mortgage when looking at the possibilities for accessing the equity in their homes. Each can be a great tool in the right scenario, but they are very different loan programs.
What is a Reverse Mortgage?
A reverse mortgage is a specialty mortgage loan that allows homeowners sixty-two years of age and older to tap into the equity in their homes. Payments can be received as a one time lump sum, monthly payments either for a set period of time or for as long as the borrower lives in the home, or as a line of credit that can be accessed as needed. The homeowner does not need to repay the loan in part or in full until he or she is no longer living in the home as a primary residence.
What is a HELOC?
A home equity line of credit is a loan where the borrower uses the equity in his or her home as collateral and receives a line of credit where they can borrow up to a maximum amount as needed over a set period of time. Monthly payments are required, some portion of the amount borrowed plus interest. At the end of the loan period (also called the draw period) the full amount borrowed is due, either in a one time payment or monthly loan payments over time. A similar option is a home equity loan, where the borrower receives a lump sum that must be repaid over time in monthly installments. The interest rate charged on the funds borrowed with a HELOC is generally variable, while home equity loans often have fixed rates.
Reverse Mortgage Benefits for Seniors:
- No mortgage payments required.
- Provide additional funds for a one time expense such as making repairs to the home, or ongoing living expenses.
- Loan does not need to be repaid until all borrowers are not living in the home as their primary residence.
- Heirs and estate not responsible for repaying amount borrowed in excess of value of the home.
HELOC Benefits for Seniors:
- Up front costs are generally lower.
- Ability to borrow only a small percentage of equity.
- May not need as great an equity position to qualify.
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Potential Benefits of Reverse Mortgages**:
- No monthly payments and no repayment is required until all borrowers are no longer using their property as their primary residence, all parties on the deed pass away, or they fail to pay their property taxes and homeowners insurance.
- Tax free monthly income*
- Payments can be used for whatever the borrower wants, including home renovations, consolidating debt, paying for medical expenses and insurance costs, and traveling and other leisure activities
- Reverse mortgages provide a tool that allows seniors to tap into the equity they have in their homes. There are no income or minimum credit score qualifications. In today’s tightening credit markets, reverse mortgage products may be one of the best solutions available to most retired homeowners.
- Possibly the greatest benefit of all, reverse mortgage programs may help seniorsremain in their homes that they have worked so hard to pay for throughout their lives.
- A reverse mortgage is what we call a non-recourse loan. This means that with a reverse mortgage you are not personally liable. The liability is only to the extent of the value of your home at time of sale, death or vacating the premises as your permanent residence. You are not liable nor are your heirs personally liable; they can either sell the home at time of your death or keep the home and pay off the remaining balance of the reverse mortgage.
Talk to a reverse mortgage professional to learn more about some of the benefits of reverse mortgages and to see if one is right for your financial needs.
- Be sure to check out our page which weighs a reverse mortgage versus a traditional home equity line of credit (HELOC).
- Also, learn how borrowers can use funds for a reverse mortgage to help pay for assisted living and/or nursing home care.
Related Topic: So, there are no monthly payment obligations? Not exactly.
*Consult a financial tax professional for details.
**Loan benefits and parameters are subject to change. Consult with a mortgage professional for up-to-date information.