Pros and Cons: Reverse Mortgage Line of Credit vs Home Equity Line of Credit
Borrowers must qualify for a home equity line of credit (HELOC) based on their credit and income.
The reverse mortgage line of credit is GUARANTEED. There is no such guarantee with a HELOC. In fact, with a HELOC, the bank can reduce or close the credit line at any time. This happened a lot after the real estate crash in 2008. The lender CAN NOT reduce or close the reverse mortgage line of credit, unlike with a HELOC.
As long as the borrower meets the requirements or a Reverse Mortgage, the amount available to the borrower in the reverse mortgage line of credit increases every month. The amount increases by a pre-determined amount, based on the previous month’s credit line balance and the current interest rate. This is a unique, powerful feature which provides the borrower with access to more funds each month.
A HELOC and a reverse mortgage line of credit are both adjustable rate loans. The HELOC is usually based on the Prime Rate and can increase, without a ceiling, as the Prime Rate increases. The reverse mortgage line of credit is based on the LIBOR index and usually has a ceiling of 5% or 10% above the beginning interest rate, depending on the product chosen (and the products available) at closing.
With a HELOC, the borrower can usually pay interest only for a period of time (often 10 years) and then the balance must be paid off over 20 years. At the 10 year mark, the monthly payment the borrower must make increases considerably. A reverse mortgage requires no monthly mortgage payments, so there is no danger of defaulting by not making mortgage payments.
Often Seniors use their HELOC to supplement their monthly cash flow shortfalls. Sometimes they even get to the point where they have to borrow funds from the HELOC itself to make the required monthly payments. However, this technique is probably not sustainable because sooner or later the borrower is likely to exhaust their credit line. Then what? How will they make the required payments? The more money that is borrowed, the higher the minimum monthly payment will be. And what will happen if interest rates start increasing and therefore, the minimum payment on the home equity line of credit also increases? This is very worrisome. With a reverse mortgage line of credit, monthly mortgage payments are NEVER required. With a Reverse Mortgage, the loan becomes due when the borrower passes away, sells or moves out of the home or defaults on other obligations such as homeowner’s insurance and/or taxes. Some of these restrictions also apply to a HELOC.
In certain (rare) circumstances, seniors who have a large HELOC balance may not qualify for a reverse mortgage because the balance they owe on the HELOC is more than we can lend them with a reverse mortgage. This is, again, very worrisome – because, if they can’t make their HELOC payments, there’s nothing we can do for them.
The upfront costs with a reverse mortgage are significantly higher than with a HELOC. If the borrower will be remaining in their home for only a short period of time, a home equity line of credit may be the best option.
With both a reverse mortgage line of credit and a HELOC, the borrower MUST continue to pay their real estate taxes and insurance.
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