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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?
My house is very old and because of the neighborhood it values at $48,000 is that too low for a reversed mortgage?
Posted on: 09th Oct, 2009 11:38 am
No, it's not too low. There isn't a minimum value with a FHA-insured Reverse Mortgage.
Posted on: 09th Oct, 2009 11:51 am
Thats really a good question, because lenders may not want to process a low mortage loan, becuase it cost them more money process than loan
Posted on: 09th Oct, 2009 05:33 pm
With a traditional FHA-insured mortgage there aren't any minimums either. However, an "Investor" may say she won't buy the loan after it's originated unless it has a minimum value. That's called an "overlay". The only Investors for HECM's are Fannie Mae and Ginnie Mae, and there aren't any overlays.

I just completed originating a HECM in Mississippi and the home appraised for $30,000.00. It was a real old house and the homeowner grew up in it, and inheritied it from her folks when they passed.

Also, for reference, homeowners aren't allowed to pay for Processing or Underwriting with HECM's. The Originator must pay for those two fees out of her Origination Fee.
Posted on: 10th Oct, 2009 08:32 am
told that if we do not refinance we will not be able to draw ant money and our monthly payment will increase because they will be billed for interest and principle any fees, past due amounts and unpaid charges accrued on our account.
Posted on: 09th Nov, 2009 11:02 pm
told to refinance in order to be able to draw funds and/or our monthly bills will be higher.
Posted on: 09th Nov, 2009 11:06 pm
My mother has a 44,400 line of credit, 35,500 home balance and I want to purchase my mother's home at this time. Home appraised for 100,000. What is it going to cost me? She has not withdrawn any money from the line of credit.
Posted on: 23rd Jan, 2010 08:07 am
cm11049 i don't quite comprehend what you mean by "what is it going to cost me?"

do you mean what would closing costs be, etc? that's dependent, of course, on the type of loan you obtain. be careful where you go shopping for a loan, because the vast majority of lenders won't grant a loan for a small amount. your best bet might be a local credit union or a community bank that would keep rather than sell your loan.
Posted on: 23rd Jan, 2010 09:30 am
When can you deduct these 2 on a reverse mortgage? 1. Mort. Ins. premium 2. Interest on funds you borrow from mortgage line of credit.
Posted on: 21st Feb, 2010 03:27 pm
>>1. Mort. Ins. premium

No

>>2. Interest on funds you borrow from mortgage line of credit.

Yes, in the year the interest was actually paid to the Lender. With most Reverse Mortgages it's going to be the year the Reverse Mortgage is paid in full.
Posted on: 22nd Feb, 2010 07:20 am
>>What is it going to cost me?

It'll be a regular purchase transaction and every Lender will be a little different, so you've got to shop around. You'll pay off the $35,500.00 to the Reverse Mortgage Lender, and Loan Fees.
Posted on: 22nd Feb, 2010 07:23 am
Does a line of credit draw interest? You do not have to pay interest on withdrawal do you?
Posted on: 30th Nov, 2010 10:22 am
Hi ted,

As far as I know, you will have to pay interest in the withdrawals that you make on your HELOC.

Thanks
Posted on: 30th Nov, 2010 11:27 pm
Ted, if you are referring to a home equity line of credit (or, for that matter, any other type of credit line), then the answer is "absolutely yes" you will have to pay interest for any amount that you use on the line. If you never borrow any money, there's not going to be any interest charges. If you borrow a penny, there will be interest.
Posted on: 28th Dec, 2010 08:08 am
>>the loans are expensive to begin with - imagine what refinancing did to her, what with paying closing costs, points, etc.

That statement used to always be true, but not anymore. Last Summer the secondary market was strong for some Reverse Mortgage programs, and I used my rebate to pay 100% of the homeowners fees. I was literally giving away free Reverse Mortgages. No Origination fee, no monthly Service Fee, and no third party fees, no FHA insurance premium, and in many cases I even paid a years worth of homeowners insurance. The secondary market isn't as strong today, but I'm still paying 100% of the non-recurring closing costs. The only fee I'm not paying is FHA's insurance premium.

>>especially those who are not particularly sophisticated financially

That's so true. People who aren't used to having much money seem to go through cash quicker then others. I always ask my clients to use an experienced Financial Advisor who specializes in Seniors to help them invest their proceeds wisely, or take the monthly check option. That way they'll receive a monthly check as long as they're living in the house.
Posted on: 29th Dec, 2010 12:37 pm
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