Reverse Mortgages vs. HELOC

Reverse Mortgages vs. HELOC- 150x150Seniors over the age of 62 who wish to borrow money against the equity in their home have two options that they should take into consideration: a reverse mortgage and a home equity line of credit (HELOC). Both of these types of loans have their advantages and, depending on each borrower’s financial situation and intentions, one can prove to be more beneficial than the other. For example, a reverse mortgage may be more expensive due to the high closing costs, but it doesn’t have to be repaid until the borrower dies, or the home is sold. On the other hand, a home equity line of credit is cheaper to get, but will have to be paid back monthly.

Advantages of a Reverse Mortgage

Reverse mortgages are designed for home owners over the age of 62. Borrowers are able to take out a loan against the equity in their home, without having to pay it back until they die, in which case the heirs will have to pay it back, or the home is sold. Reverse mortgages can be paid out in three ways: the whole amount at once, in monthly installments, or as a line of credit. Here are the main advantages that this type of mortgage loan has:

  • Reverse mortgages can be taken out as a lump payment, where the whole amount is received as one payment, monthly payments until the owner dies or sells the home, or as a line of credit which can be used in the same way as a credit card.
  • The borrower won’t need to pay back the reverse mortgage until the home is sold or the owner dies. The home will have to be kept in good condition and the taxes and homeowners insurance will have to be paid on time.
  • Unlike other loans, there are no credit or income requirements that have to be met in order to be granted a reverse mortgage loan.

Advantages of a HELOC

Home equity line of credit loans also allow the borrower to secure a loan against the equity in his or her home. The loan will have to be paid back through monthly mortgage payments, and the home will be used as collateral in the event that the borrower fails to pay back the loan. The main advantages of a HELOC are:

  • The largest advantage that a home equity line of credit has is the lower closing costs. Taking out a loan can be very expensive, especially for older borrowers, so the lower closing costs are very beneficial.
  • Another advantage is that home equity lines of credit don’t have an age requirement, unlike reverse mortgages, which require the borrower to be 62 or older.
  • Lower interest rates are also a reason why a borrower would choose a HELOC over a reverse mortgage. A home equity line of credit will have to be paid back through monthly payments, like any conventional loan, so the interest will be lower than on a reverse mortgage, which will be paid back only after the home is sold or the owner dies.

Both types of loans have advantages, but you should only choose one or the other once you have a clear understanding of everything that is involved in taking out any of these loans. Before taking out a reverse mortgage or a home equity line of credit, you must also understand that, while both loans have their advantages, there are also a few risks involved. Before deciding which loan to go with, make sure that you know what your budget, financial situation, and future plans are.

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