As you get older, you might be on a fixed income and looking for ways to provide yourself financial flexibility. As part of that process, you might choose to make use of your home equity. As part of your research, you might be comparing a reverse mortgage vs. a home equity loan. Show
Another option you might consider is a home equity line of credit (HELOC). Let’s discuss these options so you can make a determination on what’s right for you. Reverse MortgagesReverse mortgages are one of several types of home loans seniors have to choose from to access their home equity. Although Rocket Mortgage® doesn’t offer reverse mortgages at this time, we want you to be aware of all your options. Let’s break this down. Reverse Mortgage BasicsA reverse mortgage is designed to allow homeowners age 62 and older to tap into their home equity with no monthly mortgage payment – though you are still responsible for paying your taxes and homeowners insurance and maintaining the home. There’s no minimum credit score and the amount you can borrow is based on the age of the youngest borrower or non-borrowing spouse as well as the amount of equity you have. If you have an existing mortgage, it’s paid off and you get the remainder of the funds that you’re approved for. A financial assessment is conducted to make sure you have the money to handle property taxes, homeowners insurance and maintenance. If necessary, money is set aside from your loan proceeds to handle these expenses. Reverse mortgages come with fixed or adjustable interest rates, and you can receive your money in one or a combination of several ways.
The most common type of reverse mortgage is a home equity conversion mortgage (HECM). There are other types, including single-purpose and proprietary reverse mortgages, that may be offered by lenders, but HECMs are federally backed by the FHA. A HECM is a nonrecourse loan, meaning you’ll never owe more than your home is worth. Your heirs are never held responsible for the repayment. Should they want to keep the home after the last remaining borrower or non-borrowing spouse is no longer in it, they can buy it for the balance or 95% of the appraised value, whichever is lower. They can also refinance into a traditional mortgage and stay in the home. If they don’t want to keep the home, they can sell it and pay off the balance while keeping the remainder of the proceeds. If they don’t want to deal with a sale at all, they can give the property back to the lender without any impact on their credit. It’s important to note that single-purpose and proprietary mortgages may have different terms. Pros Of A Reverse MortgageThere are several unique benefits to reverse mortgages.
Cons Of A Reverse MortgageThere are also drawbacks to this option.
Home Equity Line Of Credit (HELOC)A HELOC is another option for accessing equity that may appeal to you depending on your goals. Rocket Mortgage doesn’t offer this, but we can go over how they work and the pros and cons. HELOC BasicsA home equity line of credit (HELOC) is like a credit card with the money drawn from the amount of equity you have. Unlike a reverse mortgage, you have a monthly payment. In fact, this is most often a second mortgage. One of the reasons to take out a HELOC is that you have a really good rate on your existing mortgage and you don’t want to have a higher rate in a cash-out refinance. Whether it makes sense to do a cash-out refinance or a home equity loan depends on interest rates and the amount you’re looking to take out. Interest rates for home equity loans are higher than those for cash-out refinances because if you default, your primary mortgage holder gets paid first. So it becomes a math problem. A blended rate calculation could help. A HELOC has two different time frames that are important: the draw and repayment period. During the draw period, you can access as much of your equity as you need up to your approved credit limit to use for projects, investments or expenses. During this time, you’re only responsible for the interest payments, but you can also put money back in to access at a later time. The second phase is a repayment period. During this time, your balance freezes and you can no longer take money out, but you make principal and interest payments until the end of the term. Like a credit card, HELOCs tend to have variable rates that change monthly. Pros Of A HELOCThere are several benefits to a HELOC.
Cons Of A HELOCHELOCs also have their downsides.
Home Equity LoanFinally, let’s discuss home equity loans. This option is offered by Rocket Mortgage.1 Home Equity Loan BasicsA home equity loan works similarly to a cash-out refinance in that you get a lump sum payment. Like a HELOC, it’s typically a second mortgage in addition to your primary mortgage. One of our Home Loan Experts can help you with a calculation to determine whether a home equity loan or a cash-out refinance would make more sense. The home equity loans we offer come with fixed rates. Additionally, you can get a 10- or 20-year term. Pros Of A Home Equity LoanHome equity loans have several pros.
Cons of A Home Equity LoanThere are several potential cons to a home equity loan as well.
Which Loan Type Is Right For You? Reverse Mortgage, Home Equity Loan Or HELOCEach loan option we discussed to this point has different pluses and minuses. The option you choose is likely to depend on your stage in life, your financial situation and your goals in taking the loan. How Do You Choose?Whether a reverse mortgage, HELOC or home equity loan is right for you depends on several factors including what you’re trying to accomplish, your age, interest rates and the loan terms you’re comfortable with. Here’s a comparison table we put together:
The Bottom LineReverse mortgages, HELOCs and home equity loans are three options for accessing your home equity and putting it to work for you. Reverse mortgages are specifically aimed at homeowners aged 62 and older who are looking to access their equity without having a mortgage payment. Heirs have options if they want to keep the property, but they aren’t responsible for taking on your debt. A HELOC has a draw period and a repayment period. During the draw period, you can take out as much as you need up to the amount of your approval. You can also put money back so you can use it again, but during this time you’re only responsible for the interest. In the repayment period, your balance freezes and you pay back principal and interest for the remainder of the term. With a home equity loan, this is a lump sum payment like a cash-out refinance. You pay it back over the course of the term. Like a HELOC, a home equity loan is a second mortgage, so the rate is higher than a reverse mortgage would be. You’ll also have two monthly payments with either a HELOC or home equity loan. If you would like to look into our Home Equity Loan, you can apply online or give us a call at (888) 452-0335. 1 Home Equity Loan product requires full documentation of income and assets, credit score and Max LTV/CLTV/HCLTV. Requirements are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 75%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 760 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 45% or below. Valid for loan amounts between $45,000.00 and $350,000.00 (minimum loan amount for properties located in Iowa is $61,000). Product is a second standalone lien and may not be used for piggyback transactions. To qualify for these loan programs, you must be the age of majority in your state with a valid U.S. residency. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “Higher Priced” based on the APOR spread test. Higher Priced loans are not allowed on properties located in New York. Formal approval will be subject to satisfactory verification of income, assets, credit, property condition and value. Additional restrictions apply. Not available in Texas. Apply for a mortgage today!Apply online for expert recommendations with real interest rates and payments. Start Your Application What's the difference between reverse mortgage and equity loan?Homeowners with a home equity loan make regular fixed monthly payments that include principal and interest. In contrast, homeowners with a reverse mortgage receive regular monthly payments or can access a line of credit with a variable rate. They can also receive a lump sum with a fixed rate.
What is the downside of getting a reverse mortgage?A big downside to reverse mortgages is the loss of home equity. Because you're not paying down your reverse mortgage balance, you'll make less profit when you sell, or limit your borrowing power if you need a new loan. You'll pay high upfront fees.
Which is better HECM or HELOC?The defining advantage of a HECM over a HELOC, and the characteristic that ends up winning over most seniors, is the fact that the HECM does not require you to pay monthly payments to the lender. You may draw on your credit line as needed without making a monthly payment.
Can you have a home equity loan with a reverse mortgage?Inform the lender you have a reverse mortgage and want a HELOC. To take out a HELOC, you must have remaining equity in the home. Since you can't convert the reverse mortgage to a HELOC, you must pay off the mortgage. The loan balance can be rolled into the HELOC, resulting in a higher monthly payment.
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