REVERSE MORTGAGE VS. HOME EQUITY LINE OF CREDIT
Which is Right for You?
I help clients who need to improve their cash flow. Like most people in retirement, most of your wealth is stuck in your home. Wisely, you want to keep the home and access a portion of your wealth to improve retirement well-being. Initially, most consider using a Home Equity Line of Credit (or “HELOC” for short). The plan is to take money out of the line of credit as needed (thus creating their “own” type of Reverse Mortgage). Not a bad plan on the surface, but it is a financial disaster waiting to happen!
Only an official Reverse Mortgage has the guarantee of never having to make a monthly mortgage payment*, thus making it much safer. Also, banks may (and commonly do) revoke many credit lines at any time. This is due to the fine print of all HELOCs dictating that the lender has the freedom to reduce your line at any time without notice.
A Reverse Mortgage may never be decreased or revoked by the lender.*
All HELOC interest rates are based upon prime plus a margin. When prime does go up, it usually goes up quite a bit in a short period of time. Most HELOCs have a very high cap (usually 18%-22%). The Reverse Mortgage has fixed rate options at today’s record-low levels so you are assured that you won’t be affected by any change in interest rates moving forward. Even the adjustable Reverse Mortgage caps are much lower (usually in the 8% range today). Therefore, not only are you much safer with a Reverse Mortgage because you do not have to pay a monthly mortgage payment, you are also much more protected against increasing interest rates than with a HELOC.
A Reverse Mortgage is much safer because there are no monthly mortgage payments* requirements for as long as you live in the home.
Perhaps the best and safest feature of the Reverse Mortgage is that no monthly mortgage payments are ever required (the loan becomes due when the last person on title dies or no longer lives in the home. At that time the entire loan balance is due). This is a tremendous safety feature. With a HELOC you must always pay a monthly payment. This starts out easy at first, with interest-only payments for a limited period of time (usually the first 5-10 years). However, over time your payments increase due to the higher balance being accumulated, and the real trouble begins when the HELOC switches to fully amortized at year 6 or 11. At this point, your access is cut off and your payments increase significantly. If you can’t get any more money from the HELOC, you may not be able to pay the required payment. If you can’t get a new HELOC or a Reverse Mortgage at that time, your only choice is to sell or lose your home to foreclosure.
It Is Easier To Qualify For a Reverse Mortgage
The income and credit standards for a Reverse Mortgage are less stringent than a HELOC, making it easier to qualify and obtain. Also, keep in mind that even if you qualified for a HELOC previously, qualifying is much stricter today. Therefore, most seniors living on a fixed income may now find it very difficult to obtain a HELOC.
Compare the Reverse Mortgage vs Home Equity Line of Credit
Reverse Mortgage
- No assets other than your home
- Much easier to qualify than a HELOC
- No personal guarantee
- Not responsible for any “loan shortfall”
- Program is secure
- No monthly payments ever*
- Slower adjustable interest rate
- Adjustable is based on LIBOR index
- Your un-used credit line increases over time making more money available to you.
- Knowing that if you pass away before your spouse, they would be able to live in the home until the day they pass without any worry about mortgage payments or losing the home for lack of payment. Retain 100% ownership of home
- Your home goes to your heirs upon passing
Home Equity Line of Credit
- Prove you have money
- Must have good credit
- You guarantee the loan
- You are responsible for any shortfall
- Loan may be reduced or revoked at any time.
- You pay ongoing monthly payments & your payments can increase dramatically over time.
- Rates are Prime index and will go up over time.
- Your credit line can only decrease, making less available
- Surviving spouse must come up with the monthly payment, sell or face foreclosure.
- Retain 100% ownership of home
- Your home goes to your heirs upon passing
After carefully reviewing all the options and the pros and cons of both the Reverse Mortgage and a HELOC, choosing a Reverse Mortgage is overwhelmingly the safer and more secure choice and provides the most improvement in cash flow scenarios.
Call me to thoroughly discuss your options to help you gain the most and safest improvement to your cash flow during retirement. Please do not hesitate to contact my office so that we may share our vast wealth of knowledge with you to ensure you are fully aware of all your options to obtain the most financially beneficial retirement possible. I look forward to hearing from you and answering all of your questions.
Sincerely,
Bryon Pyle (949) 440-2002
