Many people find themselves in the situation where they are deciding between reverse mortgages and a Home Equity Line Of Credit (HELOC).
So we thought we would take a look at the pros and cons of both and how you can combine both into a product that we call the ‘Reverse Mortgage Line Of Credit (RM-HELOC)‘.
Before we start, let’s quickly recap exactly what is the difference between these products.
While the reverse mortgage can be structured in a number of ways, the idea remains the same. You are always in possession of your home. We’ll take a look at other ways to take out your money (whether lump sum, monthly installments, as a line of credit, or a combination of these), but in this article, we’re going to focus on the RM-HELOC of credit option to draw a direct comparison to a HELOC.
This is the name for a product where you essentially turn it into a Home Equity Line Of Credit.
By voluntarily paying the interest each month on your mortgage you have effectively turned it into a HELOC – this is the ‘RM-HELOC’
The key word here is voluntarily – all payments you make are voluntary, where as under a Home Equity Line Of Credit you are required to make the payments every month.
Aside from the fact that your payments are voluntary – as mentioned above – there are many other reasons to choose this product.
One of the main differences right from the get-go is the qualification requirements between the two.
HELOC borrowers must qualify based on their credit and income. A ‘RM-HELOC’ is based just on age and that you own your home.
These qualification requirements for the HELOC can be a challenge for seniors, especially if they don’t have an income, have a low credit score, or have a higher debt ratio. The RM-HELOC allows seniors to access their home equity when it’s needed so they can pay off bills, supplement income, settle debts, or even simply enjoy their retirement. The idea behind it is that you’ve worked hard to build up your home equity, so you should be able to access it in a way that is tailored for retirees.
It is important to note that both HELOCs and RM-HELOC require that you keep up to date with your property taxes.
Just now – at least for the time being – HELOC rates are lower than that of a reverse mortgage (although it is worth noting that they are variable – so they could go up). However, again the key point here is the fact that making these payments is actually voluntary under the a ‘RM-HELOC’.
If you’re a little stuck one month, skip the payment. Want to go on vacation? Skip the payment. It is this flexibility and freedom that a RM-HELOC offers – the higher rate is the cost of this.
This has been mentioned, but it’s an important point, so we’ll return to it: when the loan becomes due, there can be a huge difference between a HELOC and a RM-HELOC.
Some HELOCs will allow you to take up to 80% of your home value out. While this value doesn’t usually become available to you since the lending requirements are often based on income and more, the important thing to note is how high the loan amount can get to.
A RM-HELOC in contrast, can only be for a maximum of 55%, and there is a good reason for this.
When the loan becomes due, should you move or the owners of the home pass away, your remaining 45% of your equity can be used to pay off this loan amount (and it is most common that homeowners don’t take out more than 50%).
The key takeaway is that you are a lot safer, and so is your family, should your loan become due when you can use your value of your equity, which tends to grow over the lifetime of the mortgage, to repay the amount outright.
In essence, a HELOC can actually be much more damaging to your home equity if you take out the full 80%.
It is sometimes dangerous for seniors in a situation where they have no income to take out a HELOC versus a RM-HELOC due to the fact that they may in some cases have a ballooning debt as part of their HELOC and cannot make the monthly payments since they don’t have income.
Reverse mortgages are built solely for seniors, and allow you to access the equity you have built up in your home over your lifetime without having to worry about income monthly.
A HELOC can cause severe financial stress should the loan become due and you do not have the value remaining, or the ability to access your remaining equity, to pay off the loan.
Banks can recall the HELOC loan at any time, for any reason. This is very, very rare and unlikely to happen but it should definitely be considered.
You may be forced to give up on your home to pay off your loan should it have grown to an amount as high as allowed by HELOCs – something you will never have to do in the case of a RM-HELOC.
In some cases, especially for short-term periods, a HELOC may be better suited for your financial needs. If there is a short-term debt you need to pay off, and especially if you have the income to pay the loan back quickly, then a HELOC may be the best option. However, for the long-term, and especially for retirees with no source of income, a reverse mortgage is generally the best choice.
While a RM-HELOC doesn’t quite have the same ring to it as HELOC, there is no doubt in our mind it is a superior product for the following reasons:
Yes, the interest rate is a little higher on a RM-HELOC. The question you have to ask yourself is: are all the above benefits worth paying a slightly higher interest rate to get?
As we have talked about before, there are many misconceptions about reverse mortgages. The above information should help guide you along the way.
I hope this article helped if you are thinking about a reverse mortgage, if you have got any further questions regarding a RM-HELOC – please lease a comment below and we will answer them for you.
Original Article: https://www.reversemortgagepros.ca/line-of-credit/#more-2121