Like a traditional home equity line of credit, or HELOC, the reverse mortgage line of credit gives homeowners access to the equity in their home. However, reverse mortgages, which are only available to eligible borrowers who are at least 62 years old, have additional benefits that set them apart from HELOCs.
Borrowers who are old enough and have built enough equity in their homes have several options for withdrawing money through a reverse mortgage line of credit. Some choose a lump sum, while others take monthly payments that help them portion out the money through retirement. Others only access lines of credit for emergencies that fall outside of their regular budget, such as unexpected medical bills.
Here are some other facts about reverse mortgage lines of credit, and how they differ from HELOCS, that potential borrowers should know.
Size of the Loan
HELOCS give borrowers a fixed amount of money that they can withdraw, while a reverse mortgage line of credit is more flexible. The "growth feature" in a reverse mortgage line of credit gives borrowers access to more funds the longer the loan goes untapped.
Terms of the Loan
Unlike HELOCs, which often have a set time limit, a reverse mortgage line of credit is open until the borrower dies, moves, or violates the terms of the loan. These lines of credit cannot be frozen or canceled, a power that banks can exercise over a HELOC, and as long as the borrower lives in the home as his or her primary residence, the line of credit remains on an open term.
There are fewer upfront interest and fees with a reverse mortgage line of credit. HELOCs usually require ongoing interest payments and annual fees to maintain the line of credit's availability, while reverse mortgage lines of credit don't require interest payments until the end of the loan, the house is no longer your primary residence, or the house is sold. Some reverse mortgage lines of credit have upfront fees, but they do not require additional fees to keep the line open.
Insurance and Lenders
The Federal Housing Administration insures reverse mortgage lines of credit that are opened under the Home Equity Conversion mortgage program, which the federal government regulates.
While the homeowner is accessing equity, the lender uses the home for collateral for the loan. Homeowners, who keep the title to the home, should receive blank checks and debit cards from the lender and be able to access their money through the lender's online system.
Borrowers always have the option to make payments on a reverse mortgage line of credit, a strategy that some financial planners advise because it keeps the balance of the loan low.
While reverse mortgage lines of credit have many advantages over traditional HELOCs, it is not recommended that a borrower depend on them for a regular income. When your investments are struggling or you face an unforeseen expense, a reverse mortgage line of credit can provide much-needed financial relief. For homeowners who are 62 and older looking for financial security in retirement, a reverse mortgage line of credit can be a good alternative to a traditional HELOC.