HELOC Vs. Reverse Mortgage

A HELOC is a home equity line of credit. A reverse mortgage is a home loan available to borrowers age 62 or older that does not need to be repaid as long as the borrower is still living in the home. The reverse mortgage can be taken out as a line of credit, lump sum or in monthly payments. As you enter or near retirement, you may want to consider one of these loan types to supplement your income or to provide a cushion for unexpected expenses.

Significance

• An AARP survey revealed ninety-five percent of seniors want to remain living in their homes as long as possible. Yet, according to the Center for Retirement Research at Boston College, nearly 45 percent of American households are at risk of not being able to maintain their pre-retirement standard of living. Many seniors will have to look to sources such as home equity to help them through retirement.

HELOC Qualifications

• To qualify for a HELOC, a borrower needs good credit, an income stream sufficient to make payments of the maximum amount authorized on the line of credit, along with all other regular monthly bills, and have sufficient equity in the home--generally a minimum of 20 percent remaining after subtracting the maximum authorized by the HELOC. A general rule that total monthly housing costs (including both the maximum HELOC payment under current interest rates along with any existing mortgage payments) should not be more than about one-quarter of monthly income and all regular monthly housing and revolving credit payments should not exceed one third of income. If you want a HELOC, you should plan ahead and take it out before you have retired from your job.

Reverse Mortgage Qualifications

• To qualify for a reverse mortgage, you need only be at least 62 years old and have substantial equity in your home--at least 40 to 50 percent. Credit and income are not important. You do not need other assets or a pension.

HELOC Pros and Cons

• The only cost for a HELOC are standard loan closing costs which, as of 2009, averaged $3700, and the monthly payment, which depends on interest rate and how much of the loan balance you have used. Interest rates on HELOCS are adjustable. Usually the monthly payment is interest only for the first 10 years of the loan; the payments are principal and interest during the remaining 20 years, amortized to fully repay the loan in 30 years from the date of loan authorization. Because, at minimum, interest is always paid on the loan, the house value will almost always exceed the loan balance. If you decide to sell the house or leave it to heirs, equity will remain in the property.

Reverse Mortgage Pros and Cons

• The chief advantage of a reverse mortgage is that you don't have to make monthly payments while you remaining living in the home. The loan comes due in one lump sum when you move, sell the home or die. You will never owe more than the home's value: mortgage insurance would pay the lender the difference if the home is worth less than the loan. It can be taken out in several different forms and you can combine the forms by taking some of the money out in a lump sum, some as a line of credit and some as a monthly payment. Disadvantages include high upfront loan costs--two to five times more than a standard loan and the fact that the final loan balance may result in their being no remaining equity in the house for heirs or should you decide later to sell.