Don’t Make the Mistake of Using a HELOC Loan in Place of a Reverse Mortgage!

A growing number of people are looking to the equity in their homes as a source of retirement income. Indeed, an entire industry has grown up around the reverse mortgage concept which allows you to tap into your home’s value without making any repayments during your lifetime.

One drawback of reverse mortgages is that they typically have steep up front fees. Some people think they can avoid the fees and still tap their equity for living expenses by using a low-fee home equity loan or HELOC loan instead.

Unfortunately this is seldom a winning strategy. The reason is that with either a conventional home equity loan or a HELOC loan, you have to make regular monthly payments that invariably will be at a higher interest rate than can be earned on the loan proceeds without undue risk. Moreover, if you eat through the loan proceeds to pay routine living expenses, you risk running out of money.

A reverse mortgage requires no monthly payment. The payment stream is “reversed”: Instead of making monthly payments to a lender, a lender makes payments to you.

Here are some further points to consider:

- you must qualify for a home equity loan; with a reverse mortgage there are no income requirements and much less credit history scrutiny. This is an important consideration for retirees living on fixed incomes.

- home equity loans may initially give you a higher percentage of your home’s value, but that is because you make payments on them to keep the loan balance level; a reverse mortgage accrues its interest and the loan balance grows. Over time a reverse mortgage will most likely give you more spending money than a home equity loan.

- home equity loans give the same percentage of your home’s value whether your 62 or 82, but that is because they have a fixed due date; reverse mortgages generally give more to older borrowers since someone 82 will probably stay in their home fewer years than someone who is 62 - there is no fixed due date for you to worry about.

- home equity loans have a due date when you must pay back the entire loan balance; reverse mortgages are not due until your home is no longer your principal residence.

For more information on reverse mortgages and for an excellent reverse mortgage calculator, visit the National Reverse Mortgage Lenders Association website.

Also, here’s an article on using home equity towards retirement that further discusses these issues.