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Home equity loans vs. reverse mortgages

[Oct 18, 2010.]


If you are a home owner, at least 62 years old, you may have the option of either a home equity loan or a new reverse mortgage product, called HECM Saver. If what you are looking for is a small mortgage loan to pay debts or do home repairs, one of these loan types may work. Recent changes by the US Department of Housing and Urban Development (HUD) has made small loan amount on reverse mortgages more attractive, thus creating an option for seniors seeking a traditional home equity loan. Following is a comparison of these two types of loan products.

Traditional Home Equity Loans

  • Traditional home equity loans have normal qualifying standards. You need to prove enough income to repay the loan, and you must have good credit. You must also have sufficient equity stored in your home.

  • Once your loan has been funded, and your money is in hand, you will immediately begin making monthly mortgage loan payments.

  • Home equity loans can be either fixed interest rate second mortgages or lines of credit. Fixed rate second mortgages have amortized payments for a set term. A line of credit can be used, paid, and reused throughout its term. Monthly payments on lines of credit are usually very low.

  • Because you are making payments, of at least the full interest due each month, traditional home equity loans are cheaper than the reverse mortgage option. With the HECM Saver product, you pay interest upon interest, making it the more expensive choice.

  • Banks of all shapes and sizes offer traditional home equity loans. Each bank has its own underwriting standards for approval. They each offer their own interest rates and loan-to-value ratios. Qualified borrowers can pick from a variety of offers.

Compare home equity loans, now.

New HECM Saver Reverse Mortgage

  • HUD has lowered the up front mortgage insurance premium on the HECM Saver to about .01% of the maximum claim amount. That change makes the HECM Saver a viable option for small loan amounts.

  • To qualify for a reverse mortgage, such as the HECM Saver, you need to be at least 62 years old, live in the property as a primary residence, and have sufficient equity. You cannot have an open bankruptcy. There is no need to prove income or have a certain credit score.

  • The major benefit of a reverse mortgage over a traditional mortgage is that no monthly loan payments are required. The loan is repaid when the home is no longer occupied as a primary residence, usually upon the borrower's death. Although the loan can be repaid with cash or a refinance, normally it is paid through the sale of the home.

  • Because there are no monthly loan payments, the interest due accrues. Therefore, this loan option will be more expensive than a traditional home equity loan.


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.

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