Senior citizens are often coerced into reverse mortgages failing to realize other options are available. A Home Equity Line of Credit (HELOC) is an alternative to a reverse mortgage and under the ideal conditions it could be the right choice for a borrower.

What is a Reverse Mortgage?

A reverse mortgage is similar to a loan except you will receive payments instead of make them. The loan is based on the amount of equity in your home. You do not apply as in a traditional mortgage but you are deemed eligible for a particular amount based on your home’s value, your age, the interest rates and HUD’s limits. This limit was $417,000 until 2010 when it was increased to $625,000. As you receive payments, your loan amount increases and you or your heirs are responsible to pay this amount when you pass away, move or sell your home.

What is a HELOC?

A HELOC may qualify as a viable alternative for many people seeking to leverage their home for some extra cash. A home equity line of credit is similar to a traditional mortgage loan where money is borrowed and paid back in monthly installments. Home equity is used as insurance should the borrower default on the loan.

Which one is right for you?

A reverse mortgage is a good choice for those individuals who cannot qualify for a home equity loan because of low income or credit issues or those who cannot afford the monthly payments.

Consider the pros and cons of a Reverse Mortgage:

Reverse Mortgage – PROS

• No monthly payments
• Home equity converted to income
• No income requirements
• Income is tax free
• No foreclosures
• You retain the title

Note: You are still responsible for property taxes, insurance and maintenance costs and if you default on any of those your loan may become due.

Reverse Mortgage – CONS

• Age requirement (62 years or older)
• Origination fees, insurance premiums and high closing costs
• Over time, debt increases and interest is compounded to outstanding balance
• Interest is only tax deductible when the loan is paid off.
• Equity is depleted at the end of the loan

A home equity loan is a better choice for the borrower who does not meet the minimum age requirement and who has sufficient income to cover the monthly payment.

Consider the pros and cons of a HELOC:

Home Equity Line of Credit – PROS

• Low closing costs and no insurance premiums
• No age requirement
• You retain your equity in your home once the loan is paid off
• Interest is deductible
• Lower interest rates than credit cards

Home Equity Line of Credit – CONS

• If your home value decreases, a HELOC lender can freeze your line of credit
• Monthly  payments required
• Chance of foreclosure on loan default
• Debt-to-income ratio and credit score is taken into consideration upon application

To determine how much you will pay including interest payments for your HELOC for a specified time frame, use this home equity loan calculator.

Making the Decision

After reviewing the pros and cons, determine which makes sense for you and your current situation. If you are over the age of 62 and you do not possess the supplemental income to make a monthly payment or your credit isn’t excellent, a reverse mortgage may be a better option for you.

Get in touch with a mortgage professional about alternatives and consider your future as it relates to how many years you will remain in your home, your health and your age. These factors will play a role in helping you decide which option makes the most sense.