When you need money and already have thousands of dollars invested in your home, there are options available to you. Among these are reverse mortgages and home equity lines of credit. Although the differences can be subtle and confusing, they are extremely important in making the decision about which one is best for you. Here’s a look at how the two relate to each other.
Reverse Mortgage: What is it?
A reverse mortgage is roughly what it sounds like: the money you have put into your home over the years will be paid back to you, although generally from a different company. It’s a specific type of loan for homeowners with a considerable amount of equity under their belts. Generally, rather than a lump sum, many people who take out a reverse mortgage choose to receive monthly payments. It can be a good way to supplement your income. It does have to be paid back eventually, but not until you are no longer able to live in the home or you sell the property.
Who chooses it?
Reverse mortgages are intended for older Americans—specifically those at least 62 years of age. Basically, it can be a great way to have a little more to live on than just your retirement income. Since most traditional mortgages run over several decades, the vast majority of older Americans have built up a bulk of investment in their home. Instead of selling it and having to find a different home, a reverse mortgage can give seniors the best of both worlds: the money that comes from selling a home while still maintaining a lifestyle to which they have become accustomed.
Home Equity Line of Credit: What is it?
Also called “HELOC” in banking language, a home equity line of credit is very similar to a reverse mortgage. In fact, a reverse mortgage can be given as a line of credit rather than monthly payments. Again, the home stands as equity, providing a rough estimate of how much money the homeowner can expect to draw on. Think of your home as a credit card worth $100,000. When you arrange for a home equity line of credit, you can use up to $100,000, but you don’t have to use all of it. This makes it easier to pay back, but it still allows you the financial freedom you are wanting. You use it when you need it, but you aren’t faced with the burden of having to pay back the entire amount or the interest that would be generated by using that much money.
Who chooses it?
Different banks and lenders offer HELOCs to different people. Ultimately, the biggest difference is that while you have to be a homeowner, you don’t necessarily have to be over 62 years of age. Some banks only offer HELOCs to homes on which they hold or previously held a mortgage, while others may be more generous. Candidates almost always need to have good credit, a low debt ratio, and, of course, home equity. Usually, lenders require that you owe less than the current value of the home, although this may translate into having paid off a certain percentage of your first mortgage. Because lines of credit are usually only about 75% of the equity, lines of credit may not be helpful if you own a less expensive home without a significant portion of equity. HELOCs can be used to combine debt, particularly if you have high-interest debts or finance home renovations.
