Reverse Mortgage, Home Equity Line of Credit and Home Equity Loans: Which Is Right For You?

Retirement, it’s supposed to be when everything you've worked so hard for over the last thirty or forty years has finally paid off. Many picture themselves at a cozy cottage, hitting the links, beachside or traveling the world, all while feeling financially comfortable.  That feeling of comfort is unique and particular to each individual and sometimes retirees find themselves in want or need of extra income.   For those who own and have equity in their home, there are loan options: reverse mortgages, home equity lines of credit and home equity loans.  Reported common uses for the borrowed funds can include:  daily living expenses, renovating a home for aging in place, in home care, medical expenses, back taxes, pay off credit cards, travel, supplement monthly income, or purchasing a second home.

Reverse Mortgages: What are they and how do they work? A reverse mortgage is also known as a lifetime mortgage and is available to those individuals that are 55 years or older, including the spouse. There are no payments to be made while the property is still occupied by the homeowners.   The requirements for approval are very simple:  name, address, age and spouse's age if applicable, a brief description of the property and whether or not you have any outstanding loans secured against the property.  They do not ask about income because no regular payments are required during the life of the reverse mortgage.  A property appraisal is performed at your cost and then you are eligible to receive between ten and fifty percent of the appraised value of the home.

Lump sum or fixed monthly payments
The funds are either a lump sum or fixed monthly payments for life.  You can use the money for whatever you wish with the following exception:  if you have a conventional mortgage or home equity line of credit the proceeds from the reverse mortgage must pay those off first.

No interest
You don't have to pay any interest until repayment of the loan and it accrues on a semi-annual basis. Obviously, if you have a reverse mortgage for a long period of time, the interest charges will be quite high when you go to payout the mortgage. But, there are ways you can prevent having to pay a large amount of interest all at once.  One option is to pay the interest charges annually. You're not required to do this, but certainly can do so if you choose. That way, the only amount you'll owe in the end is the principal.

Repayment of the loan isn't required until you sell your home, or it will be taken care of with your estate should you pass away before you sell your house.  Even upon death of the homeowners the house doesn't have to be sold.  If one of the family members takes over the home, they could take out a conventional mortgage to repay the reverse mortgage.




Home Equity Line of Credit (HELOC):  What are they and how do they work? In recent years, Home Equity Lines of Credit have also become a popular way for seniors to supplement retirement income.  For seniors, this product would best suit someone looking to meet ongoing cash needs, such as medical expenses.   A home equity line of credit is a pre-authorized credit line based on the value of the equity in your home.  Generally, home equity lines of credit are available for up to 75% of the appraised value of the home.  Generally the borrower is not advanced the entire sum up front and is allowed flexibility when drawing funds.  The loan can be repaid according to your own terms, those being either principal and interest, or interest only.  A HELOC may have a better image than the term “second mortgage”, but within the lending industry itself, that is exactly how it is categorized.



Home Equity Loans (Closed Ended):  What are they and how do they work?

The most common type of equity loan is the Home Equity Loan (HEL). A HEL is secured by the home you own as collateral. For example if you own a house worth $500,000 and you have 20% ($100,000) equity in the house, you can apply for a HEL and use the 20% you actually own as a security for the loan. Getting a Home Equity Loan, effectively decreases the equity you have in your house and places a lien against the property, that's why the HELs are also known as a second mortgage.  Unlike a HELOC, with the Home Equity Loan (Closed Ended) the borrower receives the entire amount of the loan upfront.  This type of product is best suited for someone who has a very specific reason for borrowing, and knows in advance precisely how much they need.  A good example for the use of a Home Equity Loan would be a home renovation that would allow a senior to age in place.





In conclusion, borrowing against your home’s equity can be good for some individuals, and detrimental for others.  Think carefully about what the funds are needed for, how much is needed and for how long.  None of these products are too good to be true; all are loans that eventually need to be repaid.  If you are considering a Reverse Mortgage, Home Equity Line of Credit or Home Equity Loan you should have a financial advisor who is knowledgeable and understands what your goals are, a tax professional, a mortgage broker and perhaps speak with other family members about it as applicable to your situation.

If one of the main reasons for borrowing is that the home is too costly to maintain for your current income level, another option to consider instead of borrowing or refinancing, is selling the home to provide you with the cash proceeds.  This money can be used to buy or rent a less costly home or live in an active adult community and the rest placed into conservative income producing investments.

It is important to look into a variety of options before settling on borrowing or refinancing as the right solution for you.

Sherri Moro, B.A., ABR*, SRES**, is an annually award winning Halton area REALTOR® with Sutton Group Quantum Realty Inc., Brokerage. For over ten years, her very successful consultative approach and innovative strategies have provided preferential client service in both the marketing and purchase of Halton area residential properties. Sherri is also a licensed Mortgage Agent with RBL Capital Inc. #10583 and can assist you with all your borrowing and refinancing needs. Visit her at . *Accredited Buyer Representative, **Specially Designated to Serve the 50+ Market.

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