Reverse Mortgages vs. Home Equity Lines of Credit
There are some similarities between reverse equity mortgages and home equity lines of credit. Both programs use equity in the property to generate cash flow for the homeowner, and both require the homeowner to pay all property taxes and insurance and utility payments.
Another similarity lies in payment options. Reverse mortgages loans offer several disbursement options for borrowers, one of which is a line of credit. If a borrower selects this option, he or she can order monthly payments or withdraw lump sums until the line of credit is exhausted. Unlike home equity lines of credit, funds borrowed against a reverse mortgage line of credit do not have to be repaid until the homeowner dies or otherwise stops using the property as his or her permanent residence.
The primary difference between a reverse mortgage and a home equity line of credit is the cash flow.
Reverse mortgages got their name because the cash flow is reversed; the lender makes payments to the homeowner/borrower, rather than the other way around. With a reverse mortgage, the homeowner cannot be forced to move out of his or her property because of a missed mortgage payment. A home equity line of credit, on the other hand, requires that the homeowner make immediate monthly payments to the reverse mortgage lender on all moneys borrowed.
Another difference is eligibility. To be eligible for a reverse mortgage, the homeowner must:
• Be at least 62 years of age
• Own the property outright or have a low enough mortgage balance that the reverse home mortgage can be paid in full at closing using proceeds from the reverse mortgage loan
• Use the property as a permanent residence
• Receive third-party reverse mortgage counseling from a Department of Housing and Urban Development-approved counseling agency
Unlike reverse equity mortgages, which include no income or medical requirements, such as credit checks, income verification, or physicals, home equity lines of credit have lending criteria. The borrower must have a sufficient credit history, score, and income to debt ratio to qualify for a home equity line of credit.
Homeowners interested in applying for a reverse home mortgage must receive third-party financial counseling from an approved counseling agency prior to obtaining the loan. During this session, all options, including home equity lines of credit, are discussed to find the financing program that best suits the borrower’s needs.