Difference between a HELOC & a Reverse Mortgage?


Difference between a Home Equity Line of Credit and a Reverse Mortgage?

Home is the abode which is the most valuable asset of a person. As other items get older, their value decreases but the value of the house or property increases over time. This increased value of the house is called equity.

This equity differentiates between the value of your home and the mortgage balance. You can equate your home if you pay the mortgage. You can use this equity to get financial help through various loans such as home equity loan or reverse mortgage.

How Home Equity Loans Work

Home equity loan gives you a loan by accessing your home equity. A home equity loan may be the best choice for you if you need cash for any repairs or larger expenses.

Some of the benefits of a home equity loan:

  • There is no servicing fee and even closing fee is very low.
  • There is no age requirement for eligibility.
  • Its interest rate is very low compared to reverse mortgage.
  • The value of the house is higher than the balance of the loan. The home will always have the remaining equity that you can leave for your child.

The downside of a home equity loan is:

  • You need to have a good credit card score.
  • You have to pay monthly to pay the arrears. If you fail to repay the loan, the lender may take over your home.

Reverse mortgage

Reverse mortgages work differently than home equity loans. It provides financial support to seniors through access to home equity. The reverse mortgage lending process is different, the purpose of which is to provide a stable income to the retired people. 

Reverse Mortgage Requirements:

  • The borrower must be 62 years of age or older.
  • In order to get a loan, they need to apply for a reverse mortgage and sign it.
  • The borrower must keep his home as his primary residence. He cannot be absent from home for more than one year.
  • The lender must own the home.
  • There is a need for counseling before taking out a loan.

There is no need to repay the loan after getting the loan from the reverse mortgage. The loan will not be in arrears as long as the borrower is at home. If the borrower dies or relocates or sells the house then the loan will be in arrears and repayable.

Why choose a reverse mortgage instead of a home equity loan?

Reverse mortgage requirements are very low. If you are 62 years of age or older, have a home of your own and have the equity available in the home, then you can safely apply for a reverse mortgage.

Reverse mortgage demand has increased compared to the past. The number of reverse mortgages has tripled in the past year, considering retirees. It offers several types of payment options. You can choose lump sum or fixed monthly payment.

The amount of loan you can get on reverse mortgage depends on a few requirements. The lender will determine the loan amount based on your age, the location of your property, the value of your property, and your family members. Simply put, the older you get, the more equity you will have access to. For example, if you are 62 or younger, you will get 15 to 20 percent of your home equity loan. You must be 80 years of age or older to get the maximum amount of loan in reverse mortgage.

Is reverse mortgage as risky as a home equity loan?

In most cases it is recommended to avoid home equity loans, especially if it is used to repay credit card loans. Many take out a loan from Home Equity to score a good credit card. If your credit card debt is high and you want to repay it with a home equity loan, your home will be secured. However, if you are unable to repay the loan on time, your home will be at risk.

On the other hand, there is no need to repay the loan on reverse mortgage. If you have no inheritance, and no running income, then reverse mortgage is best for you. Because it will pay you regularly and you will be able to stay in your home until you die.



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