Home equity loans and reverse mortgages are designed to allow homeowners to access their wealth locked away in their property. Whether you need the funds now to satisfy a debt balance, complete a home renovation, or even take the vacation of a lifetime, it beats waiting to get the funds from the sale of your home. Both of these loan products borrow against the equity in your home for liquid funds, but HELOCs are a better option than reverse mortgages. Let’s examine some of the reasons for that distinction below, and for further educational tips and information, you can visit Home Equity Wiz for all things home equity loans and lines of credit.
HELOCs are Available to Everyone, No Matter their Age
While both a home equity line of credit and a reverse mortgage function the same way on principle, reverse mortgages are aimed at people age 62 and over. A home equity line of credit is available to anyone who has at least 20% equity in their home, regardless of their age.
HELOCs Offer Cheaper Revolving Debt Options than Credit Cards
If most of your monthly expenses are put on a credit card and the balance paid-off a few months later, a HELOC might be a better option for you. HELOCs typically offer more affordable interest rates as opposed to unsecured debt like credit cards. A HELOC is designed to provide short-term access to your home’s equity by working as a second mortgage.
Reverse Mortgages Can be More Expensive than a HELOC
A reverse mortgage typically comes with a higher interest rate than a HELOC. Because reverse mortgages don’t come with a balance that has to be paid, the interest accrues into a total balance to be paid back.
A Reverse Mortgage May Not Leave Any Equity for Heirs
Since a reverse mortgage borrows against home equity and accrues interest, the sale of the house may not cover everything. A reverse mortgage loan must be repaid when you die, usually by the sale of your house. That means your lender will be paid before any children inherit what you leave behind when you pass.
Reverse Mortgages are Difficult to Cancel
If you apply for a reverse mortgage and later get cold feet about the ordeal, it can be difficult to navigate yourself out of it. Most often you will find you need to sell your home to repay the reverse mortgage loan and get access to your equity. Reverse mortgages should be reserved for homes that you know you will never need to sell.
Reverse Mortgage Fees Can be High
A reverse mortgage often comes with plenty of fees attached. There are closing costs associated with a HELOC, but they are traditionally only 2%-5% of the total equity loan. A reverse mortgage can tack on much more than that. These fees will be highly dependent on your location and local tax laws.
- Origination fees (up to 2% or $6,000) whichever is lower
- Mortgage insurance premiums – 2% of home’s appraised value
- Annual mortgage insurance – 0.5% of the loan’s outstanding balance
- Appraisal Fee – $100 to $500 dollars
- Typical Closing Costs (2% to 5% of the final loan cost)