If you are 62 or older and considering a typical home equity line of credit (HELOC) from your bank, please compare it to a reverse mortgage line of credit (RMLOC) before deciding.
|You choose when and how much to pay… Or make no payment at all *|
|No mandatory repayment deadline as long as you meet the loan obligations|
|Line of credit grows larger over time**|
|Line of credit can never be reduced as long as you meet the loan obligations|
|You can never owe more than the home is worth when the loan is repaid|
|No counseling required|
|Monthly payments required|
|10-year mandatory payback deadline|
|Line of credit remains the same over the life of the loan|
|Lender can reduce the line of credit available to you|
|If your home loses value and is worth less than the loan amount, you are still responsible for the full loan balance|
|Not FHA insured|
|Independent HUD counseling required|
It may be that a HELOC is exactly what you need, but if you plan to stay in your home for the foreseeable future, don’t want to be tied down to a mortgage payment every month, and want more flexibility, a RMLOC could be a good option.
Before you can know if a RMLOC is right for you, you need to be familiar with what a reverse mortgage is and how it works. Most reverse mortgages are FHA insured. The FHA insured reverse mortgage program is called a Home Equity Conversion Mortgage (HECM). They’ve been around since 1989 and are heavily regulated by FHA.
In a nutshell a HECM is an FHA insured loan specifically designed for homeowners age 62 and above that allows you to convert a portion of the value of your home into tax free money without having to sell your home, give up title, or obligate yourself to a monthly mortgage payment. The home stays in your name so you must continue to pay your property taxes and homeowners insurance as well as maintain the home and occupy it as your primary residence, just like you would if you owned it free and clear.
A reverse mortgage is not free money. You will be charged interest on the amount you use. Since you are not required to make any monthly payments, the interest charged will be added to the loan balance and will increase over time. However, you can make payments on the HECM and you can choose to pay as much or as little as you like, whenever you want.
There is also mortgage insurance on all HECM loans. If the loan balance ever exceed the value of the home, the mortgage insurance will cover the difference to the lender so you can never leave a debt beyond the value of the home to your estate. Your heirs will never have to repay more than the value of the home at the time the last homeowner permanently leaves the home.
Basically, FHA dictates the rules of the loan to the lender, including how much money the lender is allowed to loan. They must make this money available to you, but you do not have to take it all. This is where the line of credit comes into play.
Imagine that you only need $50,000 to do a home remodel but with a reverse mortgage, you qualify for $150,000. The lender must make this whole amount available to you, but you do not need to take it all. You can choose to take the $50,000 you need and then leave the rest in a line of credit that you are not charged interest on unless you use it.
This line of credit grows larger over time and can never be reduced or closed as long as you meet the loan obligations. You can also convert it to a monthly
payment that can be deposited into your bank account should you ever need to increase your monthly income.
It’s an incredibly flexible option that should be considered for anyone over 62 years of age.