When it comes to getting the equity from your home without just selling it, it can sometimes feel like trying to get water from a stone. There are a lot of hoops that you must jump through to gain access to that money, despite the fact it’s your financial asset. Here are some of the biggest pitfalls of reverse mortgages and HELOCs, which are the most common ways people gain access to their home equity without leaving their home.

While these options are likely tempting if you need access to liquid cash in the very near future, make sure you consider the drawbacks of both of these types of loan programs before you dive in headfirst, and know that these aren’t the only equity release options out there; there is an alternative to reverse mortgages or HELOCs, and you can find it right with a sale-leaseback.

Reverse Mortgage Pitfalls

1. Your loan balance grows every month as the monthly interest that you don’t have to pay to the mortgage company now is added to your loan.
2. The growing loan balance may mean that your loan could outgrow the value of your home, making buying out the reverse mortgage or refinancing it quite impractical.
3. It cuts into the assets available to your heirs after you’ve passed. If you’d like to leave the home to your heirs, they’ll have to pay off the loan balance or refinance first.
4. The fees on this type of loan can be quite high compared to the average mortgage.
5. If for some reason you need to leave your home, like to receive special care in a nursing facility, the terms of the reverse mortgage require that the loan balance be paid.
6. Foreclosure can still occur even though you don’t owe a monthly loan payment. Getting behind on property taxes, homeowner’s insurance, or other house-related expenses could allow the lender to take over the property.
7. Your reverse mortgage income could impact your eligibility for some government programs like social security and Medicaid.
8. Perhaps one of the biggest pitfalls is that reverse mortgage are not available to people under the age of 62.

Downsides to HELOCs

1. Access to your home equity line of credit could disappear if your home value drops due to unforeseen economic circumstances.
2. HELOCs are usually only available with adjustable interest rates, which could mean that the amount you owe could become far more than you’d planned.
3. Most of these loans require that you pay a yearly fee to keep your line of credit open, even if you didn’t use any of the lines of credit that year.
4. These types of loans may be susceptible to fraudulent activity. Identity thieves have used personal information to gain access to a person’s line of credit, where they can drain the equity in your home, causing financial, physical, and mental hardship.
5. If home values drop, a HELOC combined with a first mortgage may mean that you wind up upside down on your home. This can make a home very difficult to sell.
6. Closing costs may be high.
7. Anytime you use your home as collateral, it’s on the line. If for whatever reason you find yourself unable to pay your HELOC payments, you could lose your home.
8. Though credit requirements aren’t terribly stringent, there are some HELOC credit requirements, like good payment history and a reasonable credit score.

Are HELOCs and Reverse Mortgages Bad?

The simple answer is no, they’re not bad. However, depending on your situation, they may not be good options for you, or you might not qualify. They aren’t the only options for getting to your home’s equity, though. You could sell your home and move somewhere more affordable, or you might consider a residential sale-leaseback option.

Key Takeaways

When it comes to HELOCs and reverse mortgages and their pitfalls, they can be useful solutions for those looking to get equity out of their homes. However, there are plenty of downfalls to both that should not be overlooked. If you're considering a HELOC or reverse mortgage, be sure to consult a financial advisor first. If the cons seem to outweigh the pros for you, consider a sale-leaseback program.