HELOC (Home Equity Line of Credit)
Home equity means the amount of your home’s total value that you own. If you owe money on a mortgage not included in your equity, it will be excluded from your equity. There are many ways to tap into your home equity. These include a reverse mortgage or home equity loan. The specifics of your situation will determine which option is best for you. A financial advisor in your area will help you understand how homebuying fits into your financial plan.
What is a reverse mortgage?
A reverse mortgage lets eligible homeowners receive cash against their home equity. A Home equity conversion mortgage or HECM is the most popular type of reverse mortgage. This reverse mortgage is for homeowners who are:
- Are you 62 years old or older?
- You can own and live in an eligible property type, such as a single-family house.
- Can afford the ongoing costs of homeownership, including maintenance, taxes, homeowners insurance and homeowners insurance
- They are free from mortgages and have their own home or at least half of the equity.
- Do not default on federal student loans or federal taxes.
Homeowners must complete HUD-approved reverse mortgage counseling. You may have the option of receiving monthly payments, a lump sum payment, or access to a credit line if you are eligible for a reverse loan.
Even though it is called “mortgage, ” a reverse mortgage does not require you to make monthly payments towards it. The reverse mortgage company will make payments to you over your lifetime based on the value of your home and how much equity it has. When you die, the money must then be repaid, usually through the sale or transfer of your home in your estate settlement.
What is a Home Equity Loan?
A home equity mortgage is a second mortgage that you take out using your equity in your house as collateral. A home equity loan is a one-time payment that you receive in cash. The interest will be paid back over time. The amount you can borrow will depend on the loan-to-value (LTV) ratio and your home equity. Lenders will often limit home equity loans to as little as 85% of the home’s LTV ratio.
You are required to make monthly repayments to a home equity loan. The repayment process is similar to a mortgage. Repayments can last from 5 to 20 years, depending on the terms of your loan. The interest rates are fixed and not adjustable. This means you won’t have to worry about your rate or pay increase.
You will have to make additional payments on top of your regular mortgage to cover the home equity loan. It’s important that you consider the cost of your home equity loan and whether it is feasible for your budget.
How a Home Equity Line of Credit works
A home equity credit or HELOC, which allows you to withdraw cash whenever you need it, is flexible. HELOCs have a draw period during which cash can be withdrawn and a repayment period to pay back the amount borrowed with interest. You only need to repay what you borrowed, just like a credit card or other credit line.
You may not have to pay any payment during the draw period. Other than interest payments, there may be no payment. Depending on your HELOC terms, the repayment period usually lasts five and ten years. A home equity line credit might have a variable rate of interest rather than a fixed rate. Your rate and monthly payment can change over time to adjust to fluctuations in the benchmark rate.
Reverse Mortgage vs. Home Equity Loan
You can use reverse mortgages or home equity loans for different purposes. Reverse mortgages are designed to provide additional income for homeowners when they retire due to the requirement of Home Equity Conversion Mortgages. Seniors can use reverse mortgages to pay their daily living expenses and cover any health care costs that Medicare does not cover.
However, there are some caveats. First, a reverse loan is not a free loan. The reverse mortgage must be repaid in full. This usually means that the homeowner will have to sell their home. You will need to make another financial arrangement to leave your home to your kids.
A residency requirement is also required. Reverse mortgages are usually repaid when you move out of your home or live in a nursing facility for more than 12 months. If you are married and your spouse lives in the home, there may be an exception. This is something you should consider when looking at a reverse mortgage.
There is no age limit for home equity loans. The criteria for qualification are your home equity, credit scores, and financial status. A home equity loan can be used for the following purposes:
- Home repairs or improvements
- Consolidation of Debt
- Medical bills paid
- Higher education expenses
The home equity loan requires that you make monthly payments. You don’t have an obligation to pay the home equity loan. However, your heirs won’t be forced to sell the house to pay the debt if you die. You should be aware that defaulting on your home equity loan could lead to the foreclosure and loss of your home.
Home Equity Loan Vs. HELOC
Although both can be used for the same purpose, a home equity loan or a HELOC is different. A home equity loan is a lump sum. The lender will charge interest and fees. You are responsible for paying the full amount. The repayment process begins immediately, but a fixed interest rate makes it easier to budget.
A home equity credit line allows you only to repay what you borrowed. If you have a $100,000 HELOC limit and only use $50,000, you would only need to repay $50,000 plus interest. Your home equity credit can be used while making only interest payments during the draw period. Full repayment will occur later. Budgeting for these payments can be difficult if the variable interest rate changes.
Reverse mortgage vs. home equity loan vs. HELOC – Which is Best?
The best way to tap into your equity in your home is the one that follows these steps:
- This will allow you to borrow the cash you need.
- Recommendations that are realistic and reasonable
- You’re able to qualify for
A reverse mortgage may be a good option if you are 62 years old or older and require additional Social Security benefits or 401(k), withdrawals, or income in retirement. If your heirs have to sell the house, it’s important to understand how reverse mortgages can affect your estate planning.
A home equity loan, or HELOC, can provide the cash you can use to pay for many expenses. However, they can have different costs. A home equity loan may be the best option if you want predictability in your debt repayment budget. A home equity loan may be a better option if you aren’t sure how much money you will need, or you don’t mind the possibility that your payments may change over time.
