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.

Delinquent on Your Reverse Mortgage? Here’s Help You Need!

Delinquent on Your Reverse Mortgage- Here is the Help You Need-150x150A large number of older home owners who have bought their home with a reverse mortgage are now facing foreclosure. Borrowers, age 62 or older, have the opportunity of converting part of the equity in their homes into cash, without having to worry about paying it back. When the borrower dies, his or her heirs have the option to sell the home and cash out the remaining equity, pay back the loan and keep the property, or refinance.

Not requiring a credit score makes applying for a reverse mortgage very easy for all senior home owners, but it also makes it very easy for them to become delinquent on their reverse mortgage.

What Is the Cause of Reverse Mortgage Delinquencies?

When applying for a reverse mortgage, borrowers have a few options: receive the whole amount at once, start a line of credit similar to a credit card, or receive regular monthly payments. On a conventional loan, when the borrower takes out a home-equity line of credit, he or she will be required to make monthly payments. Reverse mortgages don’t require monthly payments, but they will be due when the owner dies or the home is sold.

Delinquencies occur when the home owner is unable to pay property taxes and homeowner’s insurance anymore. Paying these property charges is especially difficult for home owners who choose to take all the money upfront on a reverse mortgage, leaving them with very little money for taxes and insurance in the following years. Another group of seniors, the younger borrowers, are at risk of becoming delinquent on their mortgages, according to Federal Housing Administration (FHA) officials, who have come to the conclusion that most delinquencies will occur in the first four years of the loan.

What to Do If You Are Delinquent on Your Reverse Mortgage

Lenders are required to give you free financial counseling if you are behind on your property tax and insurance. You should act quickly, because the next step after falling behind on your payments is to go into default, then be evicted. Unfortunately, many seniors don’t realize that there are programs designed to help them avoid becoming delinquent on their reverse mortgage, or simply fail to act on time, and end up losing their homes.

If you receive a notice from your lender, acting quickly is the most important thing you can do. If you can’t afford to pay your property taxes and insurance, talking to a financial counselor is very important, and could possibly help you get back on track, while keeping your home. If you have the money to pay your property taxes and insurance, then your first step should be to contact your lender and find out if you should send the money directly to the tax authority and insurance company, or if your lender has already paid what was owed on your behalf, in which case you should send them your payment.

Losing a home is a very unpleasant situation, no matter what your age is. Unfortunately, because they don’t work anymore, seniors who take out a reverse mortgage are at a greater risk of running out of money, falling behind on their property tax and homeowners’ insurance payment, and eventually lose their home. However, with the help of several programs, senior home owners can get the counseling that they need in order to get back on track with payments, and avoid losing their homes.

Need a Second Mortgage? A Home Equity Line of Credit Could Be the Answer!

Need a Second Mortgage-A Home Equity Line of Credit Could Be the Answer-150x150Similar to a credit card, a home equity line of credit could be the answer for home owners who are looking to take out a second mortgage. A home equity line of credit has several unique features and more flexibility than regular home loans, so it might be a better choice for those who need a second mortgage.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) gives home owners the possibility of borrowing against the equity in their home. The borrower doesn’t receive the whole loan amount upfront. The lender will establish a line of credit from which the borrower can withdraw, up to the agreed total amount, much like when using a credit card.

The loan is given out based on the borrower’s credit score and equity available in his home. Home equity lines of credit, which are different than home equity loans, usually last for 5 to 10 years in which you can withdraw the amount that you need, for which you will be charged interest. Interest will not be charged for the whole credit line available, but only for the amount that you are actually borrowing. The period in which you can use the money is called a draw period, and it is followed by the repayment period. Repayment periods usually last 10 to 20 years, but some home equity lines of credit require payment at the end of the draw period.

Because a home equity line of credit allows you to withdraw as much as you want, within the set limit, the interest on this type of loan will be calculated daily, rather than monthly.

Benefits of a Home Equity Line of Credit

HELOCs have several strong advantages which should make this type of home loan a good choice for your second mortgage. Here are the most notable:

  • You will be charged interest only on the amount of money that you use, and not the whole credit line amount. The interest, which is tax deductible, will also be lower initially than it would be on a regular mortgage loan. There are, however, a few fees associated with setting up the loan and keeping the line of credit open.
  • Applying for a HELOC is a very simple process and the fees are much lower than on a conventional mortgage loan.
  • Withdrawing funds from a HELOC is as easy as using your own bank account. You can just use the money through a debit card or by writing checks.
  • Home equity lines of credit are also a good option for home owners who wish to make repairs or start a home improvement project, pay for education or medical expenses.

Drawbacks of a Home Equity Line of Credit

Home equity lines of credit are not the perfect loan, so they do have some disadvantages, as well. Here are the ones that you should keep in mind:

  • HELOCs are riskier than adjustable-rate mortgages, meaning that the interest rate can significantly increase over night. Interest rates change during the draw period, unlike ARMs, which give you a fixed rate for at least 5 years.
  • Paying a low interest in the beginning can be a trap for those who don’t have a good budget plan. The interest might be much higher when the time comes to pay off the principle.

As long as you are disciplined, understand what a home equity line of credit involves, and what are its advantages and disadvantages, this type of loan might be a great choice when you need a second mortgage.

Bridge Loan vs. Home Equity Line of Credit

Bridge Loans vs. Home Equity Line of Credit-150x150You’ve decided to move to a new home and you are ready to make an offer. Unfortunately, you need to sell your old home in order to be able to buy the new one. You won’t be able to pay for a new mortgage loan before selling your current home, so you basically have only two options: a bridge loan or a home equity line of credit (HELOC).

Both the bridge loan and the home equity line of credit have advantages and disadvantages. It depends on your individual financial standing if one or the other is right for you. Before deciding on which one to choose, let’s go through a few of their advantages.

Advantages of a Bridge Loan

Bridge loans are short-term loans that you can get in order to pay the down payment on your new home. Lenders are always happy to help you with a bridge loan, if you qualify. The amount of the loan is usually small, around 3 percent of the purchase price. Here are the advantages that you will have if you choose to take out a bridge loan:

  • The bridge loan can be borrowed against the equity in your old home. This is possible while the house is listed, unlike with the home equity line of credit, where the financing must be set up before listing your current home.
  • Not required to make any monthly payments until your current home is sold. This is unlike you would on a home equity line of credit. The balance on the bridge loan, as well as the interest, is paid at the time the old house is sold.

Advantages of a Home Equity Line of Credit (HELOC)

The home equity line of credit is a type of loan where the collateral is the equity in your home. What makes the HELOC different from a conventional mortgage loan is the fact that you are not given the entire borrowed amount up front. After a maximum balance is established, you may borrow amounts up to the maximum, like you would with a credit card. Here are the advantages that the home equity line of credit has:

  • The interest rate and fees are lower than on a bridge loan. The downside, as we mentioned earlier, is that you must take out a home equity line of credit before listing your current home for sale. This means that you should plan ahead if you want to use this type of financing.
  • With this type of loan you also have access to funds in the future, without reapplying. These funds can be used for home improvements or repairs, and other recurring expenses.

At first glance, it seems that the home equity line of credit is the cheapest option when it comes to short-term financing. In the end, your personal finances are the most important factor in determining if a bridge loan or a home equity line of credit is the right choice for you.