Tuesday, May 23, 2006
Reverse Mortgages & Home Equity Lines of Credit
This month we would like to compare the traditional Home Equity Line of Credit (the HELOC) to the Line of Credit option provided within the Reverse Mortgage program which has been designed specifically for homeowners over the age of 62. There are major differences that seniors should be aware of. Yes, both of these loans are variable rate loans, but that’s pretty much where the similarities end.
The traditional Home Equity Line of Credit, or HELOC, is usually structured as a second lien against your home, subordinate to a first mortgage, although this doesn’t necessarily have to be the case. HHHELOC’s are usually obtained free of closing costs although in most cases, all or part of the closing costs will be assessed if the loan is closed out within 3 years. Homeowners who are looking for a very short term loan (less than 3 years) should make sure that they know what these close out costs will be.
With the Reverse Mortgage, a Line of Credit is only one of the options available within the overall program. A Reverse Mortgage must be the first lien against the home so any existing mortgages must be paid off – either directly, or from proceeds of the mortgage. The closing costs with the Reverse Mortgage need to be considered. They are paid from proceeds at time of closing, so the program is really designed to be more attractive over the longer term. If you are looking to move from your home in a short period of time, the HELOC or other options may be more attractive.
Most commonly, with the HELOC you are required to pay interest only for the first 10 years of the loan. During this 10 year “draw down” period, you can also access (borrow against) your line of credit at any time. At the end of the 10 year draw down period however, two things happen. First, you can no longer borrow from the loan and more importantly, your payment structure will change. You will now have to pay not only the interest but also a portion of the principal, thereby significantly increasing the monthly payment required.
This HELOC feature can create a real hardship. When younger and still working, the solution is simply to “re-finance” the loan into a new one, thereby initiating a new draw down period. For seniors though, a reduced retirement income may prohibit them from financially qualifying for a refinance. They are then stuck with not only those higher payments – but also with the inability to further access the loan.
Unlike the HELOC, the Reverse Mortgage Line of Credit does not have the “draw-down” period. It is good for as long as the senior lives in the home and maintains it as primary residence.
No payments (monthly or otherwise) are ever required with the Reverse Mortgage. Instead, the balance of the mortgage increases based on the amounts drawn against the loan together with the interest and fees assessed. While payments may be made by choice, this mortgage never has to be re-paid until the home is vacated or is no longer used as a primary residence – regardless of how much time has passed. The Reverse Mortgage is an insured program. As a result, even though the mortgage balance increases, it can never be greater than the value of the home, nor can the senior ever be forced out of the home for lack of ability to pay.
With a traditional HELOC, the line of credit available to the homeowner does not change. Should the homeowner wish to increase their line of credit, they must refinance the loan.
With the Reverse Mortgage the unused portion of the line of credit actually increases from year to year, providing a greater access to the home’s equity over time – automatically, with no refinancing necessary.
Finally, there are no income or credit qualification requirements for the Reverse Mortgage. This can be an attractive feature for retired senior homeowners with reduced income or less than sterling credit.
For seniors who can qualify for it, can comfortably make the variable monthly payments and are only seeking a relatively short term financing solution, the HELOC can be a viable, lower cost option.
For seniors with a longer-term horizon, the additional benefits and security of a Federally Insured and Government sponsored program designed specifically to protect them and provide for their needs - could very well be the more attractive option.
Francis Miller is a Reverse Mortgage Consultant with
the Senior Funding Group, Hicksville, New York.
He can be contacted directly at 1-631-312-3569