If you are a homeowner over the age of 62, you may be considering a home equity line of credit (HELOC) or a reverse mortgage. Both of these options can provide you with supplemental income during retirement, but they are very different products. In this blog post, we will compare and contrast HELOC vs reverse mortgage so that you can make an informed decision about which product is right for you.
You can get a home equity line of credit (HELOC), which is an option for people who have been denied by another bank because it’s secured with the property you own, or you can get a reverse mortgage, which allows homeowners to convert their equity into cash while staying in their home and enjoy their retirement Depending on where you’re at financially, either option could be a great choice for tapping that equity.
Key Takeaways
- A HELOC is a good option if you need cash for an immediate purpose and have credit that makes it easy to borrow.
- A HECM reverse mortgage is the better choice if you want more income during retirement or plan on living in your home.
- Tax advantages: A HELOC may be tax-deductible depending on how you use it.
How HELOCs or Home Equity Line of Credit Work
A home equity line of credit (HELOC) is a type of revolving debt that allows a homeowner to borrow against the value of their home. The line of credit can be drawn upon as needed for emergency medical care, regular living costs, or home repairs. If you’re having financial difficulties, you can get a little breathing room by drawing money out of your HELOC and paying only the interest on it during the first part of the loan (called the draw period). Typically, the draw period is between five and ten years long.
The repayment period begins after that and typically lasts between ten and twenty years. It’s possible that your monthly repayment payments will be significantly higher than your draw period payments because they’ll cover both interest and principal. Since the interest rate on a HELOC fluctuates, payments may increase in months when rates are high and decrease when rates are low.
Understanding home equity loan
A Home equity loan works like a second mortgage, in which you make fixed interest rate payments on the loan you take out. However, unlike a HELOC you’re required to make monthly payments on the principal and interest. This is very similar to how you make monthly mortgage payments to your first mortgage.
Interest rates on home equity loans are often lower than those associated with traditional mortgages, and they can be helpful if an immediate lump sum of cash is needed. However, these loans cannot be turned into income like a reverse mortgage.
Unlike HELOCs, home equity loans are fixed interest rate loans that allow you to use your home’s equity as collateral. Your credit score, home equity, and remaining mortgage balance will factor into your interest rates and loan amount. If you own multiple properties, you can borrow against one or even all of them as long as the total equity across those homes meets certain requirements.
Understanding HELOCs
When you take out HELOCs, you receive a line of credit for a certain amount. It works similarly to a credit card in that you can borrow as much or as little money as you need up to the amount available on your HELOC. You can use it for whatever purpose you choose, whether it’s a new car or home renovation.
A HELOC line of credit is ideal when you need to make a purchase or pay for an unexpected expense, as you can borrow as much money as you need. For shorter terms needs, it’s a better alternative to a reverse mortgages.
How reverse mortgages work
A reverse mortgage is a loan option for homeowners who are 62 years old or older. They allow you to convert your home equity into cash, without having to move from your home. A HECM (Home Equity Conversion Mortgage) loan can be used as a supplement for retirement income or an additional income stream while no longer providing full-time care for parents living in your home.
The key advantage of a reverse mortgage over HELOC is that a reverse mortgage is not tied to credit history. A borrower can pay back the loan with interest after selling his/her home, transferring ownership of the property to a family member or friend, or living in it for as long as he/she lives.
General Requirements for a reverse mortgage
- You must be 62 years or older.
- Generally, you need to have at least 50% equity in your home. The exact requirements depend on the lender.
- The home must be your primary residence.
- You must attend a reverse mortgage counseling session either in person or over the phone.
Which option is right for you?
A HELOC is a good option if you need cash for an immediate purpose and have credit that makes it easy to borrow. If you’re looking for income and plan on living in your home, a reverse mortgage is the better choice. A HELOC may be harder to qualify for because it has limits placed on credit; however, both loans require at least 20 percent equity in your home. Before making a decision, it’s best to talk with a lender who specializes in HELOCs and reverse mortgages so you can see which one will fit your needs.
You should consider a HELOC if:
- You plan to make a major purchase and need cash immediately.
- You want the convenience of not having to make monthly loan payments but can repay the debt when you no longer use it.
- You have a great credit score. With a low-interest rate, a HELOC is likely to cost less than a reverse mortgage over the long term.
You should consider a reverse mortgage if:
- You want to increase your income during retirement.
- You need more financial stability without having the responsibility of making monthly payments on a loan.
- You plan to stay in your home for as long as you live. This is particularly true of homeowners who might not have good enough credit to qualify for a HELOC.
Tax Advantages
A home equity line of credit is also tax-deductible. With it, you can get additional money to pay for renovation or purchases that can help increase the value of your home. However, if you are not using the money to improve your home’s value, the HELOC may not be tax-deductible.
Special Considerations
If your home’s value is too low, you may not have enough equity to qualify for a HELOC. To avoid paying high-interest rates on borrowed money, it’s best to make sure you can afford the monthly payments and plan how you will repay the loan in advance.
Frequently asked questions
How is a HELOC different from a reverse mortgage?
A: Although both are loans against your home, the reverse mortgage is only available to homeowners 62 or older who meet certain income requirements. You can use it for any purpose you need, but interest rates may be higher. A HELOC is open to anyone with good credit who can afford the monthly payments.
How much does a HELOC cost?
The rates for each application vary, so it’s best to look at them together with a lender you trust. Like other loans, a HELOC is subject to interest charges and fees.
What is the Unique Credit Line Growth Feature of a reverse mortgage?
This unique feature of a reverse mortgage makes it possible for you to increase your credit line as your home equity increases. You can borrow against the increase in value of your home at any time. You
What about Reverse mortgage payments?
Reverse mortgages are handled differently than HELOCs, which require monthly payments. A reverse mortgage is paid off when the borrower dies or moves out of the home; however, your children or family members can choose to pay it off sooner if they want to continue living in the home.
The Bottom Line
A home equity line of credit or HELOC and a reverse mortgage are both options for people in different situations. If you’ve been denied a loan from another bank, a HELOC may be a good option for you but because it’s secured against your property, it will probably come with higher interest rates.
On the other hand, if you are retired or no longer providing full-time care for your parents living in your home, a reverse mortgage can be used as a supplement for retirement income or an additional income stream.
There are pros and cons to both options so it’s best to discuss your situation with a lender who specializes in HELOCS and reverse mortgages. Give me a call or schedule a free consultation to see which product is the best fit for you.
