What’s Better for Retirees: Reverse Mortgage or Secured Line of Credit?
6 January, 2012 / by Bryan Jaskolka
Retirees certainly aren’t out of options when it comes to borrowing against their home equity. Reverse mortgages, home equity loans, and HELOCs are all options; and while this might sound like it’s giving seniors the best of everything, it can also be overwhelming because homeowners don’t know which one is best for them. It usually comes down to two choices: a secured line of credit (such as a HELOC) or a reverse mortgage. These two work very differently from each other, so which one is better?
Reverse mortgages are really just a form of home equity loan. The difference between home equity loans and reverse mortgages is that the latter doesn’t need to be repaid until the home is sold, while the former has a specific date for all the money to be repaid. The general rule of thumb is that a reverse mortgage is better for those individuals that need a large amount of cash over a long period of time. Reverse mortgages are often paid out as a large lump sum, but these too can also work like a secured line of credit, where the homeowner withdraws small amounts of money and repays it whenever they can. The difference between this type of secured line of credit and a HELOC is that the interest is not due every month and nothing needs to be repaid until the home is sold.
Reverse mortgages have their own advantages and disadvantages. The biggest disadvantage to them is that they are much more expensive than just taking out a secured line of credit on the home. The closing costs can be very high and the interest rate is generally much higher than what you’d find on a home equity loan or a HELOC. In addition to that, many reverse mortgages also come with insurance fees, which are due every month. The biggest advantage to reverse mortgages is that the loan is not due until the property is sold, meaning that a homeowner (or their relatives) can use the profit from the sale of the home to repay the loan.
Another type of secured line of credit is a HELOC, and this type of loan can be taken out no matter the age of the homeowner. A HELOC also borrows against the home equity, but instead of a large sum of money, this is only a secured line of credit. The interest on a HELOC is also due every month, but that interest only applies to any money withdrawn from the line of credit during that month. One of the biggest disadvantages for retirees when it comes to a HELOC is that the lender can cut off the loan at any time and can demand that all the funds be paid back right away. This could be very difficult for retirees that are living in a very fixed income and won’t have the proceeds from the sale of their home to help pay off the loan. The biggest advantage to a secured line of credit is that only small amounts are taken out at a time, so there’s not usually a fear that the loan won’t be able to be repaid.
No one but a financial expert can tell you whether a reverse mortgage or a secured line of credit is best for any particular situation. Because every scenario, and each need is different, the best option for one person might not be the best option for another. It is important however, that you’re fully aware of the pros and cons of each, so that you can also give some input as to what would be best for you.