Mortgage and Housing

Reverse Mortgage Vs Home Equity Line Of Credit

What is reverse mortgage?

The main purpose of a reverse mortgage is to provide financial support to elderly people who own real estate but lack funds in their daily lives.re

At its core, reverse mortgage is a loan provided secured by real estate and which (if the terms of the contract are fulfilled) does not provide for the mandatory return of borrowed funds by the person who took it. After the death of the recipient of the reverse mortgage, the action of the reverse mortgage agreement is considered completed and the lender receives the right to return the funds provided on the loan by repaying the loan amount by the heirs or selling housing on the real estate market.

If, at the time of completion of the contract, the cost of housing on the market is less than the amount of the loan provided, then the difference is compensated by the insurance organization. The term of payments under the reverse mortgage agreement is agreed between the borrower and the lender when choosing a reverse mortgage scheme (one-time amount, fixed monthly payments, a line of credit or a combination of them), and it depends on the amount of funds that the borrower wants to receive.

United States in the 60s

This type of lending originated in the United States in the 60s of the last century, but only began to gain widespread acceptance in the 1990s, after the Federal Housing Administration entered the market with its reverse mortgage loan in 1989.

If a conventional mortgage loan is intended for people with income and who want to buy a home, then a reverse mortgage is addressed to people “rich in property and poor incomes.” Usually, pensioners find themselves in such a situation – after the end of their work, their incomes drop sharply, and in order to maintain an acceptable standard of living, they have to take such radical measures as the sale of a family home. Reverse mortgages allow them to convert real estate into money without physically losing that property.

Home Equity Line of Credit 

If you want to borrow a certain amount of money from the bank but do not know how much you need, or you know you will make payments over a period (for example, for your kids’ college tuition), the Home Equity Line of Credit (HELOC) can be a reasonable option. The value of your home (minus any mortgage payments still owed) becomes collateral for your loan, and based on this, the bank can provide you with a line of credit.

Reverse mortgage vs home equity line of credit

If you need long term steady source of income a reverse mortgage is works better for you. In case you need short term cash that you can repay then home equity loan is working better for you. But certainly, it depends on individual cases.

Advantages of Reverse mortgage and Home equity line of credit

  • Advantages of RM
  • Up to 55% of your home`s value you can borrow. It provides with large amount of money, instantly boosting your income.
  • You do not have to repay anything till you decide to sell your place.
  • To be qualified for Reverse mortgage, depends on location of you home, place itself, your age.

Pros of HELOC:

  • Interest rates are low generally, 0.5%
  • Large sum of money you can borrow, up to 80% of the value of your house minus your mortgage
  • It is convenient to withdrawing money when you need it

Qualification

In order to be qualified for Reverse mortgage you must follow rules below:

  • Owning your own house
  • Must be 55 and older
  • Having enough equity in your home to borrow from
  • For Canadians having Reverse mortgage is advantageous, because they do not need to provide income and credit score in order to be qualified for Reverse Mortgage

To be qualified for Home equity line of credit you must follow rules below:

  • You must own house
  • Having good credit history and no bankruptcies cases
  • To ensure that you have adequate income to cover the debt

 

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