Reverse Mortgage or Home Equity Line of Credit

A reverse mortgage, Home Equity Loan or the Equity Line of Credit allow you to cash in the equity in your home. You can use the capital to pay for medical expenses, unexpected costs or for day to day expenses. The reverse mortgage is specially reserved for people aged 62. Usually, consumers approaching retirement consider this option to afford retirement years and health plans. A reverse mortgage puts your home in danger, so people mostly use this option if they’re okay with selling their property in the end.

Unlike other loans, you don’t have to pay this loan unless you move out, pass away or sell the property.

A Home Equity Loan also gives you a sum of money which is equal to a percentage of your home’s value. You can borrow this money as a lump sum. However, it must be paid before the specified date with interest rate and other fees.

The Equity Line of Credit works similar to the HELOC. The difference is that it opens a line of credit for you. Like using a credit card, you can borrow as much money as needed from time to time. So, the Home Equity Loan asks you to pay back the entire amount (in installments or as discussed) with interest. But with the Line of Credit, you only pay the borrowed amount at the current interest rate.

These three are valid options to consider. Since your home can block a good sum of money which if used responsibly can help you from avoiding other types of debts. Also, our retiree friends, sometimes, don’t have enough funds to cover the golden years. According to Merril Lynch Study, most people approaching retirement have approximately $200,000 in the home equity, but sadly, they have 50% of that value in retirement savings. That being said, using the equity in your home can be a good way to pay for medical expenses, travel costs, and other charges.

However, it is essential to evaluate all of your options. Discuss the situation with a financial attorney. Get a 3rd party perspective.

What is a Reverse Mortgage?

Let’s understand the concept of a conventional mortgage. You borrow the money. You pay the installment to the lender. In return, you build equity in your house. With each payment, your share in the property increases while the debt amount decreases.

A reverse mortgage is the opposite. The mortgage company pays you the installment. With each episode of the mortgage, your share in the home decreases and your debt increases. However, you don’t have to pay back this loan unless you move to a different residence or you sell the property.

Requirements for a Reverse Mortgage

You should be 62 years old. That rule is slightly twisted for married couples.

There are no income or credit score related restrictions. The lenders will check your financial health to determine whether you can pay the ongoing expenses such as insurance payments, taxes, and property repair charges. If you become delinquent on taxes/insurance or the home is not in a livable condition; the lender will have to sell the property, and the loan will become due.

Age Limit Restrictions for Married Couples

The surviving spouse gets the ownership of the property if one spouse dies. However, the law is different for those who have taken a reverse mortgage. Let’s suppose; a person takes a reverse mortgage as the sole owner. That means his/her spouse is not listed on the mortgage documents. This simple mistake allows the lender to sell the property after the listed spouse dies. The surviving spouse doesn’t get to live in the home.

After facing several lawsuits, the HUD changed the law. Now the law states, that both spouses must be listed on the mortgage contract even if one spouse is younger than 62 years. So, after one spouse dies, the other partner can continue to live in the house. The loan will become due upon his death or if he/she moves out or if there are taxes/insurance payments to be paid. Please consult a real estate attorney and carefully make your decision.

The structure of a reverse mortgage is such that the surviving spouse doesn’t get any payment from the lender. So, if your reverse mortgage contract was paying you a monthly installment, it might be the time to borrow a lump sum that can be saved and invested somewhere else. Feel free to contact us for more information.

What is a Home Equity Loan?

Like mentioned earlier, you can borrow a sum of money from your equity. You must pay it back within the specified time.

Requirements for a Home Equity Loan

  • At least 20% home equity.
  • Steady income and the ability to pay back the loan with interest.
  • Your credit score must be good.
  • There is no age restriction.

What is a HELOC?

It is the best option if you are facing a financial emergency, but you have a steady source of income. You cannot pay a lump sum, but you can pay monthly installments to cover the loan.

Requirements for a HELOC

  • At least 20% home equity.
  • Show proof of stable income.
  • A high credit score is needed.
  • There is no age limit.

Which Option is Best?

A reverse mortgage doesn’t provide a real advantage if you want to keep your property. The bank will sell the house in the end. The positive factor is that you get to live in the house without paying the rent, but that comes at a cost. You are paying a higher interest rate and associated fees. A better way might be to sell your house as-is for a cash price. The funds can provide a better return if invested somewhere else. You can also use the sale proceeds to buy a smaller or more affordable house. That’ll give you a house and a savings account.

Feel free to contact us for more information.

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