Reverse Mortgage vs Home Equity Line of Credit


buying a houseAs we have previously talked about on our blog, there are many preconceptions when it comes to reverse mortgages. The basics: if you are age 62 or older and own a home with little to no mortgage payment, you can apply for a ‘reverse mortgage loan.’ You can present the equity in your home to a lender or bank as collateral for them to lend you money – either as a line of credit that you can use as needed, a one-time lump sum, or monthly payments. You can read more about the details of reverse mortgages here.

If a reverse mortgage sounds too good to be true, it’s for good reason. Even the most legitimate reverse mortgage loans come with high interest rates and exorbitant loan fees. Due to the 2008-2009 financial crisis that some financiers have referred to as “worse than the Great Depression,” many seniors have found themselves struggling financially in their golden years. Unfortunately, unscrupulous brokers have preyed upon some of these vulnerable retirees in order to profit from their financial strife.

If you are at least 62 years of age and have found your retirement income lacking, it’s important that you know how to avoid potential scams that could leave you in an even worse financial position. The following situations should send up a red flag:

  • It’s free money! If you receive an advertisement for a reverse mortgage that claims you will qualify for free money, throw the ad in the trash bin recycling container post haste. Reverse mortgages are definitely not free, and any lender who attempts to trick you by omitting important facts about fees and interest is not a lender you should trust.
  • No down payment. Not only are there down payments with reverse mortgages, but they can be quite hefty – sometimes tens of thousands of dollars!
  • Risk free. Some brokers misrepresent the risk involved in a reverse mortgage, which may lead you to believe that you can never lose your home, no matter what. The reality is that a reverse mortgage will become due if you don’t live in the home for 12 consecutive months, or in the event that you fail to pay property taxes or homeowner’s insurance. You must also keep the home and property in good condition. If you fail to meet the requirements of a reverse mortgage agreement, your home will be foreclosed upon, and you will be evicted.
  • Confusing language. If you don’t understand any or all of the information presented to you, do not sign anything. Reverse mortgage loans are notorious for being complicated and using tricky language. It is always in your best interest to seek legal counsel who can review the loan paperwork and translate anything that confuses you.

Because it can be easy to make a reverse mortgage sound like the best thing since sliced bread (and who doesn’t love bread?), many retirees don’t know that they have other options. One such alternative is a HELOC, or Home Equity Line of Credit.

While still using your home’s equity in order to boost your retirement income, HELOCs offer much lower interest rates. There is also no age requirement to apply for a HELOC, and there are no closing costs or loan origination fees. The equity in your home almost never gets depleted, which means your heirs will be able to keep your home without any problems.

Rather than requiring an age upwards of 62, in order to qualify for a Home Equity Line of Credit, you’ll have to have a very good to excellent credit score. You will also make monthly payments on your HELOC, and if you miss payments, you can lose your home to foreclosure.

If you need more information about how to increase your retirement income, seek legal counsel from a NJ attorney who specializes in credit counseling, elder law, or real estate.


Image credit: Images of Money



One Response to Reverse Mortgage vs Home Equity Line of Credit

  1. patrickfurlong says:

    How do you feel about whole life insurance universal life insurance variable life insurance annuities long term care insurance and the people that market them? Is the language confusing?
    Are there unscrupulous attorneys who sell overpriced estate planning services? How much is your hourly fee? Have you ever written an important contract that was easy for a layperson to understand without a lawyer?
    What happens when that home equity loan comes due and it will? This is essentially a balloon payment that will force them to sell the home unless they have a pot of money to use.
    You raise important and legitimate concerns.
    I would enjoy talking with you sometime about the benefits of a reverse mortgage and how to mitigate what little risk there really is when used properly.

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