Reverse Mortgage (HECM) vs. Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) allows homeowners at any age to borrower against the equity of their homes.  In the State of Texas borrowers using a HELOC can borrow up to 85% of the value of the home in the form of a line of credit.

With a HELOC, once a borrower accesses their line of credit they are required to make monthly payments to the bank.  Because these loans are generally adjustable rate mortgages, the monthly payment can fluctuate over time.

With HELOC’s, the loan proceeds can also be used for any purpose but it was originated to be a cheaper alternative to other debt such as credit cards.  Since these loans have monthly payments that can vary, these loans are best for younger people with a steady income.  They are typically used to pay off high interest debt or to put children through college.

A Home Equity Conversion Mortgage (HECM) offered by TerraVista Mortgage, LP is a federally insured loan that allows homeowners 62 and older the opportunity to borrow a portion of the equity in their homes without any required monthly repayment.  These loans are usually set up as lines of credit which allows the borrower to access cash as they need it. Although payments are always welcome at any time and in any amounts, no monthly payment is required and the loan is typically repaid when the last borrower permanently leaves the home and the property is sold.

Please note that although no monthly payments are required, the borrower is required to keep all property charges current.  That is, they must keep all property taxes, insurance and HOA fees (if any) current and they must keep the property maintained.

The amount of equity that can be borrowed with an FHA insured reverse mortgage depends on the youngest borrower’s age, the value of the property and current interest rates.

Although the loan proceeds can be used for any purpose, the primary reason behind the FHA insured reverse mortgage program is to allow senior homeowners with considerable home equity and who are generally retired with reduced income, the ability to get extra cash as they need it without monthly payments.

Pros and cons of Reverse Mortgages (HECM) vs. HELOCs

Advantages of a Reverse Mortgage

  • No required monthly payments – the loan doesn’t have to be repaid until the last borrower permanently leaves the home. (property charges must be kept current)
  • A source of extra income during your retirement years without having to sell your home
  • You can never owe more than your house is worth and the debt is never passed on to your estate or your heirs
  • The unused line of credit is guaranteed to increase by the US Government regardless of the value of your home
  • Once the loan is originated the bank never looks at your income or credit again

Disadvantages of a Reverse Mortgage

  • Costs – closing costs are higher for a reverse mortgage vs. a HELOC
  • In the long run there may be less equity for your heirs to inherit when you die
  • Must be at least 62 years old to obtain a reverse mortgage

Advantages of a HELOC

  • Costs – usually less expensive than a reverse mortgage
  • Less expensive type of credit over most other sources of credit
  • Higher loan amounts

Disadvantages of a HELOC

  • You must make monthly payments until your HELOC is paid off
  • Typically HELOCs come due every 5 years or so and the bank will reexamine your income and credit to see if your HELOC can be extended
  • You could possibly owe more than your home is worth

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