What are the differences between a Reverse Loan Line-of-Credit and a traditional Home- Equity- Line- of- Credit?
Are there certain advantages of one over the other? Are the loan terms and fees similar or are they different?
Other than sharing a similar name, these two mortgage programs are entirely different from one another in benefits, payments and loan terms, in that a borrower(s) for the reverse mortgage must be at least age 62.
With a traditional HELOC there are no age requirements as long as you can qualify for the loan using your income and credit, you could be any age. It doesn’t matter to the Lender.
With a reverse mortgage, more than likely the borrower will receive a larger amount of funds from their home, referred to as the Principle Limit VS what they may be able to receive in a traditional HELOC, plus they will not be obligated to make any mortgage payments on it.If one chooses a HELOC, they will be exposed to changes in the monthly payments because these loans are adjustable and depending upon whatever the margin is on the loan (that is where the Lender makes their money), the payments could increase over time.
Each Lender has their own loan programs, but the common option is a 15-year loan term allowing the borrower to draw down on it the first 5 years with “interest only” payments before the account is frozen and then the payments become fully amortized for the remaining 10 years.
A more recent version of the “above” is a HELOC with a 30-year loan term, with a 10-year draw before the funds are frozen and the amortized payment kicks in for the remaining 20 years.
In either case, the amortized payments (depending on the size of the loan), could be quite large and if the borrower also has a first Trust Deed on the property, two mortgage payments may become very difficult to make each month, especially if the borrowers are on a “fixed” income.
And if the financial markets become unstable, it’s quite possible that the Lender will freeze the HELOC from any further withdrawals.
HELOC’s are a great option for the homeowner that is younger, still employed and maybe wants extra money for home improvements, paying off credit card debt or have a “one-time” large expense such as a wedding.
And the closing costs are less expensive than what is charged on a reverse mortgage.
As long as a borrower can handle the risk associated with these loans, a HELOC might make sense, but for a senior on a fixed income it could put them in harm’s way and end up being a disastrous choice for access to their equity.
A better option for a senior who owns their home but would like some it’s equity, would be to utilize an FHA HECM mortgage. It’s much easier to qualify for it because the Lender does not use Debt to Income ratios or FICO scores to Underwrite the loan.
If the borrower is no longer working and their income is from Social Security and possibly a pension, all the Lender cares about is how much of that money is leftover each month after they have paid expenses related to their home and any installment debt or credit card payments.
This is referred to as their “residual income” and ideally for a couple on the West coast they will net $998 or for a single person $589. The Lender will also verify that in the previous 24 months, the property taxes, insurance and any other costs associated with the home have been paid on time.
It’s quite possible that they would be entitled to a larger amount of their equity using a reverse loan rather than a traditional HELOC and they would not be obligated to make mortgage payments, plus the funds in the HECM could never possibly be frozen in the future and always available the borrower.
For a senior and depending upon what their purpose and intent is to borrow their equity, it’s important that they thoroughly research both options and fully understand the risks associated with borrowing money from their home before they make any decisions.
Both loans have their benefits, but ultimately, it’s up to the homeowner to decide for themselves which one is the best choice for their goals and financial situation.