Why Home Equity Lines of Credit are Better than Reverse Mortgages

A reverse mortgage is designed to provide you as a homeowner with more money per month as you won’t be making ongoing payments anymore. Some people feel they need this money in order to pay off other debt, pay a large bill, make improvements to their home or pay college tuition for someone in the family. This reverse product will require you to pay your property taxes each year and your homeowner’s insurance, but your monthly costs are intended to be much lower. A home equity line of credit is similar in relation to the money that you can acquire per month, but it tends to be a much better option than a reverse mortgage. Let’s take a look at why that may be, including other tips that you can use for making a wise financial decision.

Who Can Apply for a HELOC, and Who Can Apply for a Reverse Mortgage?

Your average reverse product is usually marketed to people who are older, around the age of 62 or more. A home equity line of credit applies to anyone who is looking to find some additional funds, regardless of what their age is. As long as you have at least 20 percent equity in your home, you should be able to secure a HELOC.

Reverse Mortgages Can Be Expensive in the Long Run

Your average reverse product comes with a relatively high interest rate. It will almost always be more than a HELOC that you would get from the same financial institution. A reverse doesn’t have a balance to pay off, which is why interest will build up into a balance that will need to be paid back. Not to mention, a reverse mortgage is borrowing money against your equity. As this interest builds up, the sale of the house might not be enough when all is said and done. This means that there may not be anything else to leave to your family members after you pass on some day.

What About the End of the Process?

Once you have applied, it can be difficult to cancel the entire ordeal. You would potentially have to sell your current home and repay the loan before you would gain back access to your equity. You only want to take on a reverse mortgage, if you know that you don’t want to cancel at any point. A home equity line of credit is much easier to sever ties from.

What about the Fees?

Just about any loan or line of credit is going to come with some sort of fees. While a HELOC has closing costs that you have to plan for, they are only around 2 to 5 percent of the entire loan amount. A reverse typically has much higher fees that will depend on the current local tax laws in your area. Reverse will also have origination fees, insurance premiums, mortgage insurance costs, appraisal fees and more. You can inquire with the financial institution of your choice to find out all of the fees and costs that you should expect from either of these products.

What do you think?

Written by Millennial Staff

MiLLENNiAL is a lifestyle magazine profiling those who are shaping the world we experience. From business innovation and career strategy to sustainable health and cultural disruptors, MiLLENNiAL shines the light on the young change makers of the world.

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