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.
I felt like a boulder had been lifted off my chest. I had worked hard all my life and paid the bills to take care of my wife and 3 daughters. Mostly it had been living paycheck to paycheck. Now with the reverse mortgage, we have the money to do the things we want to do and a cushion for any emergencies.
WOW – Was I surprised. I never knew a mortgage loan officer could be so helpful. Tom reviewed my refinance and while reviewing our mortgage application and property information, he recommended we apply for a tax reassessment. He told us how to do it and sent all the links and paperwork for us to fill out. We saved $4,042 per year in taxes and even more with the new lower rate.
Marc R., Upper Makefield, PA.
Nan was an excellent representative for her company. She presented me with many different loan scenarios and happily met with my financial advisor and accountant and even my attorney. We all decided that taking out the reverse mortgage was the best thing for me because it put to work some of the large amount of equity I had in my home. This meant that I could draw down less of my investment accounts.
The reverse mortgage allowed me to bring my father home from a nursing home to the home he wanted to be in.We were able to pay for the at home nursing care with the funds from the reverse mortgage. He was able to stay at home and be with his dog.
Andy helped me save money. My local bank (large bank) was .25% higher and they acted like they were doing me a favor talking about loan programs. They were very helpful and the process was smooth.
Ed J., Levittown, PA
Nan was absolutely fantastic to work with! I decided to finally go through with a reverse mortgage after I met her. I had complete confidence in her and she made me feel very secure through the whole process. I use my reverse mortgage to pay my real estate taxes and it’s a great emotional security knowing that money is there if I need it.
Dick was able to help me with my mortgage when my husband and I were going through a divorce. During a very difficult time for me, Dick was able to work through the differences and problems I was having. He was able to get my mortgage closed in a very quick time which was essential for me.
Licensed Mortgage Banker in PA and NJ NMLS Company License 112272 NMLS Individual License 134755
Licensed by the PA Department of Banking and Securities Licensed by the NJ Department of Banking and Insurance These materials are not from HUD or FHA and were not approved by HUD or a government agency. All employees are Bonded and Insured