The reverse mortgage vs HELOC – which one makes the most sense for your situation? While the answer is not easy to derive, we examine the pros and cons of both so you can make the best decision for your lifestyle.
If you’ve worked hard and paid into your home, yet find yourself needing some cash sooner than later, you can explore your options with a reverse mortgage vs HELOC. A reverse mortgage is a loan that you take out on your home for cash-out equity, payable only after you die from your estate. A HELOC is a home equity line of credit that you take out in the present, with payments due on the funds you borrow and an assigned interest rate. Keep reading to learn which one may make the most sense for you.
Pros of a Reverse Mortgage
A reverse mortgage is a viable way to cash out some of your home’s equity without having to absorb a monthly payment. But there are some requirements. You have to have your home mostly paid off and be of the age of 62 or older and the primary occupant. It does offer some perks, though.
- No payments are due until after you die.
- You can cash out up to 50% or more of your equity.
- Available in lump sum, monthly payment or credit line.
- Fast closing process takes only a few weeks.
- Is not based upon your credit rating or income.
Cons of a Reverse Mortgage
Like anything attractive in this world, a reverse mortgage is not without its share of cons, either.
- You are required to be a primary resident for at least two years.
- If you sell your home, you have to pay off the loan right away.
- Can make it difficult to leave behind an estate for your loved ones.
- Will put a lien on your home against the available equity.
- Interest rates and closing costs are high.
Pros of a HELOC
A home equity line of credit, or a HELOC, is another good option for borrowing. This loan is income and credit based, and comprises a higher interest rate. The amount you can borrow is bank approved and is mostly based upon the equity that your home holds.
- Fast approval time, in a matter of days.
- Locked in interest rate, but higher than standard home loan.
- Based upon your equity, credit rating and income.
- No early repayment fees, no closing costs.
- Use the cash as you need it.
Cons of a HELOC
There are some associated cons to using a HELOC loan that you should be aware of.
- Ties up your credit rating and debt-to-income ratio.
- Attaches a lien to your home for the amount borrowed.
- Is limited by the equity you have in your home.
- Amounts borrowed are due via monthly payments right away.
- Interest rates are higher than a conventional equity loan.
So there you have it. The reverse mortgage vs HELOC loan with the pros and cons explained. When you sum it all up, provided that you meet the requirements, a reverse mortgage seems to make more sense. No income requirements, equity based, low interest rates, lump sum cash options and no repayment until death are all likeable attributes of the reverse mortgage.