If you are a homeowner age 62 or older, you have several options for converting the equity in your home into cash. Reverse mortgages, home equity loans, and home equity lines of credit (HELOCs) all allow you to tap into the equity in your home without having to sell or move out of your house. This money can then be used to pay for living expenses, home renovations, health care costs, or anything else you may need.
Each of these financing options is unique in its own way, making it essential to understand the difference between a HELOC or home equity loan vs. reverse mortgage, so you can make the best decision for your situation.
Reverse mortgages work differently than traditional mortgages. Instead of you sending payments to your lender, your lender sends payments to you based on a certain percentage of your home’s value. This results in your debt increasing as you receive these payments and interest accrues. At the same time, the equity you have in your home decreases as your lender buys more and more of your home.
You continue to hold your home’s title. When you move out of your home for more than 12 months, sell the house, or pass away, the loan becomes due. This can also happen if the home falls into disrepair or you become delinquent on insurance or property taxes. If both you and your spouse are the mortgage holders, the lender can’t sell your home until both of you pass away or leave the property.
When the loan becomes due, the lender will sell the house and recover any money that was paid to you along with other applicable fees. The remaining equity will go to you or your heirs.
Home Equity Loan
There is a significant difference between reverse mortgages and home equity loan. With a reverse mortgage, the lender makes monthly payments to the homeowner; with a home equity loan, the homeowner makes monthly payments to a lender. You can borrow against your home’s equity with a fixed monthly payment and interest rate. Homeowners get a lump sum and then pay these funds back over a specified period of time, usually between five and 30 years. Since a home equity loan has a fixed interest rate, your monthly payment never changes.
You can use this lump sum of money any way you’d like. Some homeowners use the money to fund significant renovations or repairs such as remodeling a kitchen, updating a bathroom, or adding a room. Other homeowners take out a home equity loan when interest rates are low or to get a fixed interest rate and then pay off higher-interest credit cards.
Home Equity Line of Credit (HELOC)
Similar to a credit card, home equity lines of credit give you the option to use the equity in your home on an as-needed basis and only pay interest on money actually withdrawn.
Prior to the 2017 Tax Cuts and Jobs Act, homeowners were able to deduct some or all of the interest from home equity loans on their taxes. Currently, the interest on HELOCs and home equity loans isn’t tax-deductible unless the money is used for home renovations on the property securing the loan.
HELOC or Home Equity Loan vs. Reverse Mortgage: Key Differences
Home equity loans, HELOCs, and reverse mortgages all allow you to turn the equity you have in your home into cash. However, each has different terms of repayment and disbursement, along with various requirements, including income, credit score, equity, and age. Using these factors, here are the key differences between a HELOC or home equity loan vs. a reverse mortgage:
- Home equity loan: You receive one lump sum payment.
- Reverse mortgage: You can receive monthly payments, lines of credit, a lump-sum payment, or a combination of the three.
- HELOC: You can borrow money as needed from a pre-approved line of credit available via a checkbook, credit, or debit card.
- Home equity loan: You will repay this loan via set monthly payments based on a fixed interest rate over a set period of time.
- Reverse mortgage: You will repay a reverse mortgage all at once when the loan matures. Loan maturity happens when you sell or transfer the title of your house, permanently leave your home, or default on the terms of the loan.
- HELOC: You will make monthly payments during the repayment period of the HELOC based on the amount borrowed and current interest rates.
Age and Equity Requirements
- HELOC and Home equity loan: There are no age requirements you will need to meet, however, you will need a minimum of 20% equity in your home.
- Reverse mortgage: You need to be 62 years or older, and either own your home outright or have a minimal mortgage balance.
Income and Credit Status
- HELOC and Home equity loan: You will need a good credit score and be able to show proof of steady income that can meet all of your financial obligations.
- Reverse mortgage: There are no income requirements. However, some lenders confirm that you can make full and timely payments for ongoing property costs, including insurance and property taxes.
Deciding between a home equity line of credit or home equity loan vs. a reverse mortgage can be an overwhelming decision. All three allow you to turn the equity you have in your home into cash, but they all may not be the right fit for you.
Reverse mortgages are popular with homeowners who don’t mind their home not being part of their estate and are looking for a long-term income source. For homeowners who want to keep ownership of their home, are able to take on another monthly payment, and prefer a short-term cash source, a HELOC or home equity loan is likely a better choice.
Point provides you with another option, paying you today for a part of your home’s future appreciation. There are no monthly costs associated with a Home Equity Investment, and you have the option to sell your home or buy back your equity from Point at any time. Finally, costs are capped, meaning if the value of your home appreciates significantly, your profit margin is protected. Contact us today to get started.Tags: Home Equity, Reverse Mortgage