How Do HELOCs and Reverse Mortgages Work?
You’ve been told that buying a home is an investment, but is it feasible to recoup some of the money you’ve sunk into your mortgage without leaving your home? The answer is absolutely, there are a couple of different loan types available, the main two being HELOCs and reverse mortgages. Both are viable options for equity release, and both have their pluses and minuses.
HELOC vs. Reverse Mortgage
There are a lot of differences between these types of loans. For example, reverse mortgage and HELOC credit score requirements vary quite a bit. We’ll start with how they’re similar, and then go on to explain how each works, to help you understand the differences between the two.
The major similarity between these types of loans is that both are based on your home equity. They allow you access to cash now based on the equity in your home. This means that if you become unable to meet the financial obligations that come with these loans, you risk losing your home.
What’s a HELOC?
HELOCs, or home equity line of credit, are loans essentially given with the equity you’ve built in your home used as collateral. It is a line of credit, which means you have access to the funds on an as-needed basis, and the borrower will pay monthly payments first to cover the interest during the period where the equity is accessible and then over a set term to repay the loan, typically within 10-20 years. They provide access to about 80% of the cash value of your home, minus the mortgage still owed. At the end of the loan, assuming all has gone as planned, the home still belongs to the homeowner.
This type of loan is generally recommended as a short-term solution to a cash flow issue.
A rough guideline of the requirements for taking out a HELOC are as follows:
- At least 15-20% of your home’s value in equity
- Credit score equal to or greater than 620
- Debt to income ratio lower than 40-50%
- History of on-time payments
What’s a Reverse Mortgage?
A reverse mortgage, also known as a home equity conversion mortgage (HECM), allows homeowners 62 years old or older to receive a loan in the form of a lump sum, monthly payments, no mortgage payments, or a line of credit. This can continue until the borrower sells the home, is no longer able to continue living in the home for whatever reason, or passes away. At which point, the loan balance must be paid, usually from the sale of the home.
This is more of a long-term solution, since there are limited options for getting out of a reverse mortgage, and unless your financial state has changed drastically somehow, the majority of them include selling your home in one capacity or another.
The requirements for reverse mortgages are as follows:
- 62 years of age or older
- Must be current on mortgage payments, little history of late payments in past few years
- Must be free from federal debt
- Home must meet FHA requirements
- Some potential credit requirements that vary by lender, though non-traditional credit reports are often allowed
Are These Programs Right for You?
First, you’ll have to determine if you (and your home) meet the requirements of the reverse mortgages and HELOCs that are explained above. If your credit history is less-than-stellar, you may have a hard time qualifying for those loans, but that doesn’t mean that you don’t have monetary assets in the form of your home equity. If these programs aren’t right for you, check out Sell and Stay, a new residential sale-leaseback program that allows you to tap your home equity, without moving or digging deeper into debt.
Tom BurchnellProduct Marketing Director
Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast.