What is the Difference Between a Reverse Mortgage and a Home Equity Loan?
Determine Which One Is Best For You
If you are 62+ and considering a reverse mortgage, this was probably one of the first questions on your mind. Both are essentially loans that allow you to convert your home equity into cash, but they do this in quite different ways. It is important to understand this so you can decide which properly fits your needs.
Why a home equity loan?
A home equity loan is a second mortgage. There is no age requirement but to qualify you generally need steady employment and a good credit history. This type of loan uses the equity in your home as collateral. Your property is appraised and the loan amount is issued on its estimated value. You receive the money as a lump sum and make monthly payments on the principal and interest just as you would with your mortgage.
Generally speaking, since you are actively repaying the debt, a home equity loan is a good choice for those who need short term access to cash and intend to retain ownership of their house to pass to their family or heirs.
Why a reverse mortgage?
More properly known as a Home Equity Conversion Mortgage (HECM), this type of loan became available in the United States in 1988. In order to qualify you must be 62+ years old, own your home outright or have a small balance left. There are generally no income or credit requirements. Like a home equity loan, a reverse mortgage gives you a certain amount of money based on the equity in your property. However that’s where the similarities end.
With a reverse mortgage you stop making your monthly mortgage payments (if you still owe) and receive money from the bank instead. This money can be disbursed in monthly installments, as a lump sum, or as a line of credit. This arrangement continues only if you remain in your residence and continue to pay maintenance, insurance, and property taxes. The loan becomes due when you die, or you fail to meet these requirements.
Since you are not actively paying off the loan, the amount you owe continues to increase with interest, especially if you haven’t paid off your original mortgage yet. However, it is set up so that if the amount of the loan becomes higher than your home’s value, your heirs will not incur the debt at your death, as the Federal Housing Administration will pay.
A reverse mortgage is a good choice for financially strapped older Americans looking for a steady source of income in their autumn years, particularly those who aren’t concerned about what happens to their house after the pass.
Basically, aside from how much money you are going to get, how you’ll receive it, and how you’ll pay it back, the determining factor we see in deciding between the two is, as a homeowner, what are your ultimate plans for your house?
If you are 62 or older and you own a house, you owe it to yourself to get a free information kit from the American Advisors Group. They are the industry leader and have been ranked number 1 in reverse mortgages for 2016. (Full disclosure, we partner with American Advisors Group and recieve a small referral fee if you give them your business.)