“With the millions of baby boomers already retiring, and the millions more that are set to in the coming years, many of those boomers are starting to think seriously about what they’ll do for income in their golden years; and they’re continually trying to find ways to make a few more dollars available. Of the many choices that are available for retirees, the two most popular continue to be reverse mortgages and HELOCs. So, which one is better?
A reverse mortgage is a second mortgage loan that does not need to be paid off until the time the owner sells the home. A HELOC, while still a second mortgage loan, is a line of credit that can be tapped into and withdrawn from whenever needed. HELOCs generally do not have a lump sum payment, as reverse mortgages do, and they do require the principal of the loan to be paid at regular intervals throughout the life of the loan. Both HELOCs and reverse mortgages have their advantages; but to make sure that seniors aren’t getting in too deep a borrowing hole, especially when there’s little income coming in to support it, HELOCs are generally the better answer.
There’s a big difference between the way interest rates are decided for a HELOC, and for a reverse mortgage. A mortgage broker will be able to break these down and calculate them both with you, but they tend to be much higher with a reverse mortgage, which means that you’ll end up paying much more on that second mortgage loan than you will a HELOC. Also, even though the interest on a reverse mortgage doesn’t need to be paid until the time the home is sold, that interest will account for the principal as well as the interest accrued throughout the life of the loan. This is a very important point, and one that many homeowners don’t realize when looking at attractive reverse mortgages.
With a HELOC on the other hand, you do need to pay the interest in full every month, regardless of how much you pay down on the principal. While this may not seem as attractive to those looking to borrow, it also means that the debt will be more manageable and be paid off sooner, leaving those retirement years to be truly golden. To go along with being required to pay interest every month, the lender could also at any time ask that the HELOC be paid off in full. To save this from becoming a panic situation, retirees are recommended to borrow no more than 40% equity with a HELOC. Lenders are less likely to ask for full payment in those circumstances, and the owner won’t be caught with a negative loan:value ratio.
Lastly, it’s also important to understand that HELOCs are much harder to qualify for than reverse mortgages. While with the latter you really only need to be of retirement age and have equity in your home, a HELOC is treated much like your first mortgage, with your income, debt, credit score, and other credentials being taken into consideration. For this reason, it’s best to apply for a HELOC while you’re still employed. That way, you’ll still be able to enjoy all the benefits (such as lower interest payments,) and it will be much easier to become approved for. “
