Four Things To Consider When Choosing Between A HELOC And A Reverse Mortgage

[Aug 18, 2009.]

 

1. Like HELOCs, Reverse Mortgages Still Need To Be Repaid
A reverse mortgage is essentially an interest-only loan that capitalizes the principal balance along with the interest finance charges. Over time, the loan balance grows in size because of the monthly payments made to the homeowner and the interest charges that accrue over time. Unlike a regular mortgage or HELOC, a borrower is not required to immediately repay their reverse mortgage. But like any other loan, the mortgage lender must eventually be repaid. In a reverse mortgage, the mortgage lender defines a number of events where they have the right to call their loan due. In most instances, borrowers agree to repay their debts with the posthumous sale of their home. If the borrower does decide to relocate, sell, or refinance in the future, the loan must also then be repaid.

2. Borrowers  Still Need To Compare Interest Rates With Reverse Mortgages
Although reverse mortgages utilize the equity within a borrower's home, many are still surprised to find out that interest rates play a role in such a mortgage. While credit scores and income are rarely an issue, reverse mortgage loan amounts are typically based on a borrower's age, the home's appraised value, and the available equity in the home. Compared to HELOCs and other home equity loans, reverse mortgages tend to have higher interest charges and fees since lenders must wait a longer period before finally getting repaid.

3. Find Out The Minimum Monthly Payment Required For A Home Equity Line Of Credit.
Although HELOCs require a mandatory monthly payment, borrowers should consider that most home equity lenders only require the interest finance charges as the minimum monthly requirement. Additionally, borrowers can similarly receive a lump-sum payment with their home equity loan or continue to draw on their credit line until they reach a maximum limit set by their lender.  But due to the recent economic slowdown and tightened credit, borrowers may have a tougher time finding HELOC lenders with more flexible terms. Choosing this path also means that borrowers will be forced to sell their home and eventually downsize when they can no longer maintain the required monthly payment.

4. Get Comfortable With The Terms, Closing Costs, And Interest Rates Of Your Loan
If a HELOC offers low closing costs, flexible draw periods, affordable minimum payments, and loan terms, the HELOC makes more sense from a purely financial point of view. But as most would expect, the simple attraction to a reverse mortgage cannot be ignored--it sure sounds like an easy decision to choose between a traditional home equity loan and a 'home loan' that actually pays the borrower every month. But before proceeding with either decision, it would be best to consult with both a mortgage professional and a fee-based financial planner. In fact, borrowers considering a reverse mortgage must first complete a counseling course before proceeding with the final closing.

In reality, each of these mortgages can be the 'best' mortgage option for different homeowners. But in this case specifically, consulting with a professional for individual recommendations is highly recommended since each mortgage is structured so differently and addresses two entirely different homeownership goals.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.