The Ultimate Line of Credit
Today’s reverse mortgages may include a line of credit that can have very flexible features. Many people are unaware of these features. This article provides a simple feature comparison of these two very different products. The advantages and disadvantages are compared side by side.
Some homeowners are facing the very unfortunate consequences of having obtained a typical Home Equity Line of Credit (HELOC) from a bank that has now terminated and requires large monthly payments. Let’s compare that to a Reverse Line.
Starting Rate & Annual Cap
Both of these loans have starting interest rates that are guaranteed for a specific period of time. The difference is that the Reverse Mortgage has an interest rate that can change only once every 12 months with a maximum increase of 2% per year, therefore the rate is guaranteed for one full year at a time. The traditional conventional line of credit that banks issue can change its interest rate as often as every month and there is no limit how much the rate can change during a year, other than the lifetime interest cap.
The Maximum Lifetime Interest Cap
In a worst case scenario the Reverse Mortgage can only increase 5% higher than the starting interest rate in the entire life of the loan. Even that would take 3 years because of the annual 2% increase cap. A regular Home Equity Line of Credit the Banks Issue (HELOC) could reach that level without any time restriction.
Fees to Acquire
Depending on many factors a Reverse Mortgage can have little or no fees associated with it after the lender credits the borrower for the Margin and initial draw. It can also cost many thousands of dollars of costs in other scenarios. Only a discussion directly with your lender can disclose your options for your individual situation based on your circumstances and individual choices.
Monthly Payments & Amortization
A Reverse Mortgage requires timely payment of property taxes, homeowners insurance and HOA dues just like any other loan. But it does not ever require regular monthly payments of principal or interest as long as at least one of the borrower’s continues to reside in the home and the loan is not in default. Compare this to a Bank HELOC – it requires interest payments every month for usually a period of 10-15 years. Then the loan requires full principal and interest payments to be made over the next 15-20 years. This means that when the typical Bank HELOC loan enters the repayment period in the 10th or 15th year the monthly payment increase required can be astronomical. Many borrower’s are unable to pay the new amortized payments on their retirement income. It is also a very high risk in a rising interest rate environment.
Reverse mortgage loans have an annual premium of 1,25% that is accrued to the loan balance to cover the risk of the program and assure its availability in the future. It is a cost that should be considered because these fees are not payable on conventional HELOCs.
Government Guarantee - Increasing Line Feature
What this means is that the amount of money available to the borrower on a line of credit is guaranteed to be available to the borrower by the US Department of Housing and Urban Development (HUD).
The financial stability of the mortgage company issuing the loan now or in the future is not factor because of this guarantee. All of this is possible by the insurance premiums pooled by HUD to cover losses. Regular lines of credit from a Bank can be cancelled if the lender believes you are no longer credit worthy or their security (equity) is impaired. During the last economic downturn of 2008 thousand of Americans with regular HELOCs received letters abruptly canceling their lines of credit. This would never happen on a reverse mortgage.
In fact, one of the most unique features of a reverse mortgage is that any unused line of credit will actually increase the amount that is available year after year, Guaranteed by HUD, without re-qualifying in any way.
These mortgages can be a viable financial solution for many seniors. But they must be considered carefully and structured for specific to your individual needs. This is not a product for one size fits all. When done properly it can truly be a blessing.
|Reverse Mortgage||Bank HELOC|
|Annual rate cap||2.000%||Unlimited|
|Maximum life cap||5.000%||18.00%|
|Frequency rate change||Annually||Monthly|
|Fees to acquire||$575||$275|
|Termination date||None||10 yr|
|Minimum monthly Payment||None||Yes|
|Amortization required||None||20 yr|
|Mortgage insurance premium||1.25%||None|