Homeowners borrow money for a multitude of reasons. Those who have paid off a larger portion of their mortgage have access to the equity that they have accumulated. Accessing the equity provides funds for completing projects and paying certain expenses. However, the homeowner must make a decision about what product is right for them when obtaining funds that equate to the value of the first. Two possible opportunities are HELOCs and reverse mortgages.
Age Restrictions for Credit Lines
The reverse mortgage is the only option of the two that has an age restriction. Property owners aren’t allowed to get the mortgage unless they are 62 years old. The HELOC is available to any adult who owns a home and has equity.
Repaying the Lender
After the end of the access or draw period, the lender sets up a repayment schedule for the HELOC. It is relatively straightforward and doesn’t create serious confusion for consumers, especially seniors. The process is the same as a repaying a retail store card account. Interest is applied to the exact amount used by the property owner, and they pay back the full balance.
Reverse mortgages provide funds every month until the owner runs out of equity. But the property owner doesn’t repay the lender. This is where seniors often become confused about the process and what it really means.
The Slippery Slope of the Reverse Mortgage
Reverse mortgages may be true that the property owner isn’t responsible for repaying the funds they borrow, but what happens when the owner dies is that the lender seizes the property and sells it. A common ploy to get seniors to accept the mortgage is that their family has the option to repay the money and keep the property. The problem is that the family has a limited time to pay back the money before the home is sold at auction. Some lenders won’t give the family this option in the first place. They are told that they can bid at the auction to purchase the home.
Remaining in the Home
Lenders who provide these mortgages allow the property owner to stay in the property throughout the remainder of their lives. Regardless of if the owner ever decides to repay the funds they borrow, the lender is unable to make them leave. With the credit line, yes, if the borrower is 90 days delinquent, then it is likely that they are at risk of losing the property, too. But the property owner has more control, and the lender cannot swoop in and seize the property immediately.
The Ability to Repay the Lender
The applicant’s income and income-to-debt ratio define their ability to repay the lender. At 62, some property owners have retired and are living on either retirement funds or savings. Others just receive Social Security payments. Accepting the mortgage presents some difficulties down the road if the property owner wants to repay their lender before they die.
This isn’t a problem with the HELOC since more borrowers qualify for the credit line. In comparison, the credit line is more advantageous, and typically with a favorable interest rate. The property owner qualifies at a younger age and is more likely to have a more substantial income. They also avoid the trappings involved in accepting the mortgage and ultimately losing an asset for their heirs.