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Which is better - Line of credit or reverse mortgage?

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 02nd Jul, 2006 04:14am
If you have built up adequate equity in your home, then the first mortgage choice that comes up in your mind is a home equity line of credit. Lines of credit are usually used to meet your short-term cash requirements. But, in case you are 65 years of age or more, then you have another option open before you. You can use your home equity to obtain a reverse mortgage loan too. Now, in case both these options are available before you, which one is better? It depends upon your current financial situation as well as short-term and long-term requirements.


Line of credit offers you the chance to borrow money for a shorter period of time and you have to start repaying the loan with immediate effect. So it makes sense to go for a line of credit in case you need money to meet short-term needs and are in a position to repay it with immediate effect. But if you need cash for a longer period of time, then you have to make payments for a long time. If you are a senior living on fixed income, the extra payments for an extendable period of time may be too burdensome for you.


With a reverse mortgage loan, you don’t have to make any payment until you sell your house or decide to move to a new location. Here you don’t make any payment, instead payments are made to you in the form of monthly payments or lump sum amount but your equity in your home gets reduced. Reverse mortgage loans specifically made for the seniors who are not in a position to service an ordinary mortgage loan over a long period of time. In fact, a reverse mortgage loan is a nice plan to supplement your income on a continuing basis.


How long can you stay in your home?


In both these types of loans, your home is used as the collateral. In case of a home equity line of credit, as long as you make payments, your home remains safe. But once you stop making payments, your lender can repossess your property. In case of a reverse mortgage loan, you can stay in the house until you sell the house or move out to a different place.


Which one is better?


Both the reverse mortgage and the lines of credit are viable borrowing options. Before making a choice between these two options, you need to take into consideration your short-term and long-term financial objectives as well as your current financial situation. If you are looking for a predictable and conservative mortgage for now and for the future, then a reverse mortgage loan is perhaps a better choice for you than an equity line of credit.
Posted on: 02nd Jul, 2006 04:14 am
My mom, 79, owns her home free, the house worth $540,000. I recently visited her and was shocked to see the condition of her house. The roof leaks and there was the smell of the mold. Finally she admitted that she has outlived her assets, except for the social security and the pension. I suggested a reverse mortgage, but she says her banker recommends a home equity line of credit pay for the new roof and other repair work. She wants to stay in her house especially because she likes the neighborhood and the surrounding areas. What option do you think is better?
I will recommend the reverse mortgage, as it has got so many benefits and its meant for old people.

refer this for all kind of benefits you will get out of reverse mortgage - http://www.mortgagefit.com/reverse.html

You can also do a comparative study of how it is better then other loans
http://www.mortgagefit.com/compare-reverse.html

Thanks
Posted on: 02nd Jul, 2006 04:22 am
Hi Tyler,

Welcome to the forum

The home equity line of credit requires paying monthly installments of at least the interest only part. Since your mom lacks a good source of income, so I believe this option will not work out much. Rather suggest her that a reverse mortgage will be better. But there are huge up-front fees and one should stay in her home for at least 5 years if she wants to make up for the costs by getting the loan advances.

Thanks.
Posted on: 02nd Jul, 2006 04:23 am
Hi,

The reverse mortgage can help in times of financial problems. Your mother can use a part of the loan advances for the repair work, and for any kind of big purchase and the rest can be obtained as a credit line or lifetime monthly income. So this is the a better choice compared to an equity loan.

Thanks,
Jerry.
Posted on: 02nd Jul, 2006 04:37 am
Your mother can take cash in a lump sum as well as recieve income payments. The fact that the banker recomended a line of credit is rather selfish and uncaring. The reason the banker made the recomendation is because he or she probably can't do a reverse mortgage or doesn't understand how they work
Posted on: 02nd Jul, 2006 09:04 pm
I have a reverse mortgage and am taking the funds by line of credit. The balance in the line of credit is over $100,000. I'm concerned that the bank may stop funding the line of credit. I know they can do this on a regular line of credit. Can they stop funding a Reverse Mortgage Line of Credit?
Posted on: 07th May, 2009 01:35 pm
Thats quite possible, when they figure that the risks for them is too high.

Lot of banks are cutting the Linf of credit for so many cosumers based on their payment history and credit score.

You have heard in the news, how banks are doing and how many people are gettign approved for a new loan.
Posted on: 07th May, 2009 09:11 pm
With a reverse mortgage, it's possible to withdraw roughly half the value of your home.

A 70-year-old owner of a $200,000 house, for example, could take out $113,000 at today's rates or opt for a $700 monthly payment for life. You don't need good credit, a high income or ample savings to qualify.
Posted on: 07th May, 2009 09:19 pm
Hi Eugene,

A reverse mortgage line of equity is not same as a regular line of credit. For instance, unlike a regular line of credit, no interest is charged on the unused portion of your reverse mortgage line of credit. When you obtain a reverse mortgage, you enter into an agreement with the lender. Thus, I don't think the lender can stop funding your line of credit all on a sudden, because that would be against the terms of the agreement that you signed. By the way, is it an FHA-insured Home Equity Conversion Mortgage that you have?
Posted on: 07th May, 2009 11:18 pm
that's an interesting line of questioning here. home equity lines of credit are, after all, an agreement between borrower and lender also. that doesn't stop the lenders from taking action when they feel less secure.

i am becoming more and more skeptical about the value of reverse mortgages, however; particularly in this economy. except for the cases in which people can take a monthly stipend to supplement whatever other income is coming into a household, i believe there's way too much danger for a borrower who gets involved in a reverse mortgage. lately, we've seen some pretty disastrous situations resulting from these loans.
Posted on: 08th May, 2009 08:05 am
George,

Can you share some of the disastrous you have seen. It will be good for every one toknow the good and bad side of everything.

Thank you,
Posted on: 08th May, 2009 08:09 pm
honestly, the best example is one a colleague of mine is working on now. a lady had no mortgage at all 4 years ago, borrowed $150K on a reverse mortgage. she took about $25000 in cash and the rest stayed on a line of credit. who knows what happened, but she subsequently refinanced and suddenly owed about $185000.
next up, she refinanced again (now these are ALL reverse mortgage transactions), and the loan is now up to $248000. equity has been eaten up, and she sits at home now with no lights (shut off), no phone (shut off) and no health insurance (canceled due to non payment). she doesn't have enough income to live on and doesn't know where to turn.

she's 74 years of age. obviously she got caught by a loan officer or two who saw a chance to make money and probably didn't see the long range effect on this woman's life. i'm not trying to say anyone was shady, but we in the lending field need to be cognizant of what effect these loans will have on people - especially those who are not particularly sophisticated financially.

the loans are expensive to begin with - imagine what refinancing did to her, what with paying closing costs, points, etc.
Posted on: 09th May, 2009 06:03 am
Wow that is really a terrible story.

Folks be careful and this story is really heart breaking.Especially when some one at age 74 is being literally been dragged in to some thign which they cannot get out.

I am sure there are enough good loan offers around, but some times you want to extra cautious ( 200%) before you sign on something.

Good luck every one.
Posted on: 09th May, 2009 10:28 am
>>Can they stop funding a Reverse Mortgage Line of Credit?

No. That's where you insurance comes in. You paid a stiff premium when you got the Reverse Mortgage, and you're also paying .5% per year on the outstanding balance, and the insurance is what enables the mortgage to remain stable and unaltered as long as your home is your primary residence.
Posted on: 03rd Jul, 2009 10:16 am
>>Thus, I don't think the lender can stop funding your line of credit all on a sudden, because that would be against the terms of the agreement that you signed.

I didn't think they could do it either, until it happened to me. Last year I received a letter that thanked me for my on-time payments and informed me I no longer had access to the remaining portion of my credit line. I told my peers about it and it started happending to them too.
Posted on: 03rd Jul, 2009 10:23 am
>>she took about $25000 in cash and the rest stayed on a line of credit. who knows what happened, but she subsequently refinanced and suddenly owed about $185000.

I'd like to know more about the "who knows what happened" part of the story - she received an awful lot of money from the first Reverse Mortgage, and more cash from the other refinances. Why is she broke now, only a short time later? I'd ask more questions before pointing the finger at the Reverse Mortgage. There's more to this story then meets the eyes.

And, just as a FYI, the fees are a lot lower when a HECM is refinanced, because FHA's insurance is prorated.

I'm interested in knowing more about what happened to this homeowner and would like to talk with her.
Posted on: 03rd Jul, 2009 10:33 am
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