Looking for a loan you can live with?
If you want to access the equity in your home without having to sell your house, most people think of a home equity line of credit (HELOC) first. But, if you’re 55 or over and own your own home, there may be a better option: a reverse mortgage.
To help you decide which is a better solution for you, below we compare a reverse mortgage vs HELOC.
What is a HELOC?
When it comes to accessing your equity with a HELOC, you can typically take out a larger loan than with a reverse mortgage. A HELOC provides access to up to 80% of the value of your home (minus the amount you owe on your mortgage) or 65% of your home’s value, if you have no other liens on your home.
With a HELOC, it is revolving credit, meaning you have access to the money but only start paying interest when you actually borrow from it. As you pay off the loan, the amount you can borrow increases (a big advantage of a HELOC vs reverse mortgage). There is no set period of repayment, but you must make at least the minimum interest payment every month.
How does a reverse mortgage work?
A reverse mortgage also allows you to use your home as collateral to borrow money. The amount you can borrow is based on your age, home’s location and the equity you hold.
With a reverse mortgage you can choose to make no monthly mortgage payments until you decide to move or sell your home. Instead, the interest simply compounds on the outstanding balance while the entire value of your home also continues to appreciate. When you sell your home, you pay off the accumulated amount of the loan and keep the rest.
What are the key differences between a reverse mortgage vs HELOC?
Repayment
With a HELOC, you have to make monthly interest payments as soon as you withdraw money from the account.
With a reverse mortgage, you don’t have to make any regular payments – principal or interest.
Income and Credit Score
When it comes to qualifying for a HELOC, you need to have good, provable income and a decent credit score. Banks use debt service ratios to qualify their customers to make sure that they can afford the payments.
Qualifying for a reverse mortgage is much simpler; it’s more about your age and your home’s equity and location (your income and credit score aren’t considered).
Interest Rates
When it comes to HELOC vs. reverse mortgage interest rates, HELOC rates can sometimes be between one and three percentage points lower, though when prime lending rates are high, that’s not always the case.
Also, fixed reverse mortgage rates won’t change over the course of the term, while HELOC rates are variable and can rise and fall, along with the prime lending rate.
Compare with Reverse Mortgage vs HELOC Calculators:
You can use a HELOC interest calculator to work out how much you could borrow, depending on your home’s equity, and how much the monthly interest payments would be.
And for a reverse mortgage, you can calculate how much you could borrow with this reverse mortgage calculator.
Borrowing Limit
You could potentially borrow more with a HELOC vs. a reverse mortgage, as it usually allows you to borrow up to 80% of the value of your home (including your current mortgage, if you have one). However, you would have to prove that you can pay off the loan, with sufficient income.
When you compare a home equity loan vs. reverse mortgage, the maximum amount you’ll be able to borrow with a reverse mortgage is 55% of your home’s value. The amount you qualify for will depend on your age and a few other factors.
Costs
The costs involved when taking out a reverse mortgage vs. HELOC are a little different. There is a closing and administrative fee charged when you take out a reverse mortgage, and is approximately $1,795-$2,995 (you can see the CHIP Reverse Mortgage current closing fee here).
To set up a HELOC, you may need to pay an appraisal fee as well as legal fees and an application fee, which can easily add up to around $1,500, depending on the size and location of your home.
Eligibility
Qualifying for a reverse mortgage:
To qualify, you must:
- Be a homeowner.
- Be aged 55-plus.
- Have enough equity in your home.
A huge plus when applying for a reverse mortgage vs. home equity loan is that income and credit score aren’t factors when qualifying for a reverse mortgage.
Qualifying for a HELOC:
- You must own your home.
- You need good credit for a HELOC (typically 740+ for the best rates) and no bankruptcies or proposals.
- One major disadvantage of a HELOC vs. reverse mortgage for retirees is that you must be able to prove that you have adequate income to service the debt. Lenders’ debt service ratios can make it difficult for retirees to qualify.
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What suits your needs? Reverse mortgage or HELOC
Which is better, HELOC or Reverse Mortgage?
When considering a reverse mortgage vs. HELOC, for many retirees, a reverse mortgage is a better option. There are no regular mortgage payments to make, so your retirement income isn’t affected. It’s usually much easier for retirees to qualify for a reverse mortgage vs. a HELOC. And, because there are no mortgage payments, you won’t lose your home through defaulting.
Reverse Mortgage vs. HELOC: Compare the Pros and Cons and find which is better for you
As with any loan, there are advantages and disadvantages of HELOCs vs. reverse mortgages. Here are the key ones:
Pros of a reverse mortgage:
- You can borrow up to 55% of your home’s value, either in a lump sum or regular payments.
- The main advantage of a reverse mortgage vs. home equity loan is that you don’t have to repay a cent of it until you decide to sell or move.
- There are no payments to make, so you won’t default on your loan.
- Qualifying for a reverse mortgage is based on your home, its location and your age, not your income and credit score
Pros of a HELOC:
- Interest rates can be as low as prime plus 0.5%.
- You can borrow up to 80% of the value of your home.
- You only start paying interest when you draw from your HELOC.
- You can draw money whenever you need it.
Cons of a reverse mortgage
- When comparing a home equity loan vs. reverse mortgage, rates can be higher with a reverse mortgage.
- If you choose not to make interest payments, the loan amount will grow.
- You need to keep up your home insurance and pay property taxes.
Cons of a HELOC
- With a HELOC vs. reverse mortgage, you have to prove your income and have good credit, which can make it hard to qualify for.
- You must make regular monthly payments, which can be difficult for retirees.
- Rates and payments can increase with the prime rate, making it harder to budget for.
- If you default, you could lose your home.
Reverse Mortgage vs. HELOC: A Case Study
When deciding on the best way to access the equity in their home, Don (70s) and Michelle (late 60s) considered the benefits of a reverse mortgage vs. HELOC. Don recently had a stroke that left him partially immobilized. They’d considered selling their house and moving into a retirement home, but they loved their home too much.
Instead, they decided to fix up their house to make it more accessible for Don, by installing wheelchair ramps, railings, etc. It was a large investment, but worth the expense to be able to stay in their home. The question was how to pay for it.
They considered a home equity loan but were worried that they’d struggle to make the payments, especially if Don passed away. They might be forced to repay the line of credit, which would mean selling their home.
Between a HELOC vs. reverse mortgage, they decided on a reverse mortgage, as it gave Don and Michelle the money they needed to stay in their home and the peace of mind of knowing they wouldn’t have to move out until they were ready to.
Find out how much you could borrow with a reverse mortgage
For retirees who are wondering whether a reverse mortgage or HELOC is a better option for them, as you have learned, a reverse mortgage is a much better way of cashing in on your home equity. With no regular mortgage or interest payments to make, it frees up more money and you never have to fear losing your home because of defaulting.
Use our reverse mortgage calculator to work out how much you could borrow or call us at 1-866-522-2447.
