If your home has been appreciating in value and you've been making your mortgage payments consistently, and on time, you're probably sitting on a decent amount of equity. Whether you're thinking about tapping into that equity to help pay for a big home improvement project, supplement your retirement income or cover other major expenses, there are a few different ways to borrow against the equity you've accumulated. Show
As you compare your options, here's a rundown of what you need to know about the differences between a reverse mortgage, a home equity loan and a home equity line of credit, or HELOC. What is a reverse mortgage?Appropriately named, a reverse mortgage operates in the reverse direction of a traditional mortgage. Instead of making payments each month to pay down your principal, you'll receive a check each month (there are also options to borrow in one lump sum), and you won't have to make payments until you sell the home or you die. This isn't for everyone, though. You need to be at least 62 years old to apply for a reverse mortgage. There are also different varieties of reverse mortgages: single-purpose, which restrict the way you can use the money; home equity conversion mortgages, or HECMs, which are insured by the federal government; and proprietary reverse mortgages, which can have higher limits than government-backed loans. Pros
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TakeawayIf you're an older homeowner with a lot of equity -- at least 50% -- in your home, a reverse mortgage can be a smart pathway to accessing cash. These can come with serious consequences, though, for your spouse or what you pass along to your heirs, so it's important to do your research. You'll have to complete a homeownership counseling course if you take out an HECM (a reverse mortgage backed by the US Department of Housing and Urban Development), which can help answer your questions. What is a home equity loan?A home equity loan -- also often called a second mortgage -- lets you borrow based on the amount of equity you've accumulated in the home. Most lenders will only allow you to have a maximum outstanding mortgage debt of 85% of the value of the home (with some exceptions) between your first mortgage and the home equity loan. The loan is a fixed-rate loan, and repayment periods typically range between five and 30 years. Pros
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TakeawayIf you have a firm number in mind of the amount of money you need to borrow, a home equity loan can be a good option. You'll need very good-to-exceptional credit to qualify for the lowest rates, though. What is a HELOC?HELOC stands for home equity line of credit. While it has similarities to a home equity loan, a HELOC has a couple of key differences. First, it's a line of credit instead of one lump sum. So, you'll only draw funds as you need them during the so-called "draw period," which typically lasts for 10 years. Second, a HELOC has a variable interest rate that moves either up or down based on market conditions. Your payments will fluctuate as the rate adjusts. Like home equity loans, you're typically limited to a combined mortgage debt of 85% of your home's value. Pros
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TakeawayA HELOC is a great fit if you aren't sure about how much money you'll need, and you have a financial cushion in your budget to withstand a payment increase when your rate goes up. Reverse mortgage, home equity loan and HELOC
Reverse mortgage vs. home equity loanIf you're older than 62 and trying to figure out whether a reverse mortgage or a home equity loan is a better fit, you'll need to think about one big question: Do you want to pay the loan back now, or would you prefer that your payments be delayed until you move or pass away? The other key consideration is the type of reverse mortgage you're hoping to use; if you qualify as a low- or moderate-income senior and want to use a single-purpose mortgage, you'll be restricted in how you can use the funds. Home equity loan vs. HELOCWhen comparing a home equity loan with a HELOC, the biggest question involves whether you want the comfort of a fixed-rate payment that will never change or you're OK with a variable rate. However, you might not have to choose. Some lenders are now offering the best of both worlds with HELOCs that allow borrowers to convert a portion or all of their loan from a variable to a fixed rate. Additionally, you'll want to think about how the closing costs on a home equity loan stack up against any annual lender fees on a HELOC. While the upfront costs might look overwhelming, those fees can add up over time on a HELOC, too. Home equity loan vs. HELOC vs. reverse mortgage: Which one is best?There isn't a simple answer when comparing a home equity loan versus a HELOC versus a reverse mortgage. Each one offers a different set of benefits for certain types of homeowners. As you compare your options for tapping into your home equity, consider this simple guidance to get started:
The bottom lineThere are pros and cons to consider with home equity loans, HELOCs and reverse mortgages, but the most important lesson to keep in mind is that all of these will increase your debt and create a heightened risk of losing your home to foreclosure. Make sure you read the fine print to fully understand the fees you'll pay and the rules you'll need to follow to maintain good standing on your loan. What is the difference between a line of credit and a reverse mortgage?Key Takeaways
Reverse mortgage lines of credit allow seniors to access the equity in their residence without having to move or make loan payments. With a line of credit, the borrower only accrues interest on the balance.
What are the downsides of a HELOC?HELOC cons. Rates are variable. HELOCs have variable interest rates, which means the rate you're charged can change. ... . Risk of payment shock later on. ... . Your home is on the line. ... . There may be prepayment penalties. ... . You may pay ongoing fees.. Is there a better option than a HELOC?A home equity loan is a better option than a home equity line of credit (HELOC) if: You know the exact amount that you need for a fixed expense. You want to consolidate debt but don't want to access a new credit line and risk creating more debt.
Is a reverse mortgage the same as equity release?Reverse mortgages are a form of equity release loan that allows you to unlock a percentage of money tied up within the value of your property. Rather than make regular payments, any interest is rolled-up on top of the amount borrowed with your property acting as security for the loan.
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