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www.SeniorsResourceGuide.com/National/veteranaffairs
For an interactive on-line tool that can help you determine which line of credit is most appropriate please visit www.rev-mtg-info.com.
It is a well-established fact that retirement, just like life, is unpredictable. Unexpected emergencies and opportunities can arise at a moment's notice putting strains on the portfolio of those blessed with abundant assets, and wreaking havoc on those more constrained. Yet, at the same time, American retirees sit on a mountain of untapped home equity. The total available home equity to Americans, based on 2000 census data, was more than 4 trillion dollars, or 3 times the amount owned as financial assets. Many individuals view this home equity as their nest egg and cushion against financial difficulties. There is a fear; however, that plagues people regarding their home equity. Most people intuitively know that when you need to convert your home equity to cash you often can't, or if you can, the costs may be extremely high. For this reason, is may be wise to plan and take action early. Some tax experts and financial advisors are encouraging their clients to explore preemptive strategies - strategies allowing individuals or couples to tap the equity in their home pre-approved, at a time when it is possible and reasonably inexpensive to set up those reserve funds. Let us take a quick look at the similarities and differences of the two major lending products that provide on demand liquidity; home equity lines of credit and reverse mortgages. Two Products - Differences and Similarities ... Amount of Credit Available HELOC: Depending on the qualification characteristics, a Home Equity Line of Credit (HELOC) can be available for up to 100% of the value of the home. REVERSE MORTGAGE: The initial line of credit from a reverse mortgage will always be less than a HELOC, and is determined by the age of the borrowers and the zip code in which the property is located. A unique feature of the reverse mortgage is that the available line of credit grows every year if it is not used. This growth rate is 7.26% as of the 11/16/2006. In other words, unlike a HELOC, the amount of credit available keeps up with inflation as it automatically increases without re-qualification, EVEN IF PROPERTY VALUES DECLINE. Monthly Payments HELOC: The Home Equity Live of Credit requires the payment of interest charges during the "draw period", and then full repayment during the "repayment period". Each of those periods is usually 10 years. During the draw period, monthly payments are currently 0.75% of the loan outstanding every month. This repayment amount jumps to about 2% per month of the loan outstanding the repayment period. REVERSE MORTGAGE: Conversely, a reverse mortgage has no monthly repayment obligation. The entire loan becomes payable when the home is no longer the principal residence of the borrowers, but until then absolutely NO repayment is required. Repayment at Sale or Death HELOC: A Home Equity Line of Credit must be paid back in full when the home is sold or if all borrowers have died. The amount required to be repaid is the full amount of the then outstanding loan, regardless of value of the property or sales price received. The heirs are required to pay off any shortfall if the home cannot be sold for enough to repay the loan. REVERSE MORTGAGE: A Reverse Mortgage is a non-recourse loan, meaning that should the property be worth less than then loan amount outstanding the heirs DO NOT have to pay off the shortfall. This shortfall becomes the lenders problem and does not impact the rest of the estate. The same is true if the home is sold at fair market value during the life of the borrowers. Any shortfall, even during the lifetime of the borrowers, DOES NOT have to be repaid. Length of Time Line of Credit is Open HELOC: As indicated above a Home Equity Line of Credit usually has a 10-year draw period during which money can be taken out of the line of credit. If customers which to extend this period they have to re-qualify for a new loan under the rules in effect at that time and pay all the closing costs all over again. REVERSE MORTGAGE: The line of credit available from a reverse mortgage is open for the lifetime of the borrowers, without needing to re-qualify or incurring additional closing costs. The unused line of credit available grows annually as discussed above at a rate higher than interest rates charged. Foreclosure-Risk of Losing the Home HELOC: Under a Home Equity Line of Credit a home will be foreclosed by the lender if the borrowers do not make their payments as agreed. REVERSE MORTGAGE: As there is no current payment requirement in a reverse mortgage a home cannot be foreclosed for failing to pay on the loan. Costs HELOC: Costs associated with a Home Equity Line of Credit vary widely. They range from "no cost", which means you will pay a higher interest rate, to potentially very high up front origination, discount fees, title and appraisal costs, particularly for borrowers who do not have great credit and income. Those costs are set by individual lenders and not regulated. Depending on the size of the line of credit upfront costs of up to 10% of the loan are possible. Those fees often can be paid from the line of credit, therefore not requiring any up front money from the borrowers. REVERSE MORTGAGE: Costs associated with a Reverse Mortgage can appear to be high, or could be as little as $0, depending on the product selected. As in the case of the HELOC some costs are set by the lenders, but unlike a HELOC for the majority of loans the major costs, such as origination and mortgage insurance fees are limited to a maximum by federal law. The effect is that those costs are usually capped at about 8% of the original line of credit. As with a HELOC all those costs can be paid from the loan proceeds, and thus not requiring any up front money from the borrowers. Qualifying for a HELOC or Reverse Mortgage. What does it take? The HELOC and the REVERSE MORTGAGE are both subject to major elements of traditional loan approval. The three elements for traditional loan approval are: Collateral, Credit and Capacity. The HELOC is subject to all three elements, the REVERSEMORTGAGE may be easier to acquire.
ELEMENT 1 - COLLATERAL: Collateral is defined "property used as security against a loan"
If the collateral, or asset is reduced, the amount of money available from either a reverse mortgage or home equity line of credit is reduced, therefore a consumer may see reason to open a line when the value of the property is substantial, and before any of the above events can happen. ELEMENT 2 - CAPACITY: Capacity is usually referred to as income. Many seniors do not have sufficient income, or a verifiable job, to qualify for a traditional loan, and thus are restricted to "No Doc" lines of credit that carry high costs and are limited to small loan amounts. On the other hand a reverse mortgage has no employment or income requirements. ELEMENT 3 - CREDIT: Credit is the most commonly understood element of qualifying for a loan. Home Equity lines of credit require good credit to qualify. The REVERSE MORTGAGE has almost no credit qualifications. Poor FICO scores and recent bankruptcy do not stop borrowers from being approved for a reverse mortgage. The only credit items than can disqualify a person from a reverse mortgage are unpaid federal debts. ELEMENT 4 - OTHER: A reverse mortgage has a qualification requirement not associated with a HELOC. All borrowers who will be on the title of the property must be at least age 62. Summary Many people ask what the differences are between a Reverse Mortgage and a Home Equity Loan when examining options to access equity for a senior homeowner. Below is a side-by-side summary table comparing the attributes of both options:
For an interactive on-line tool that can help you determine which line of credit is most appropriate please visit www.rev-mtg-info.com. If you are considering a loan consider using a Financial Advisor or Certified Financial Coach to help you review your loan options. The U.S. Department of Housing and Urban Development also provides a website with a wide variety of housing information; government policies/regulations for government insured loans, new homebuyer information, database of housing counseling agencies for all of the United States, funding news, community housing development information and fair housing information. Visit their website at www.hud.gov. |
