Home Equity Loan Vs. A Reverse Mortgage: Which One Is For You?
Can’t decide between a home equity loan and a reverse mortgage? It’s understandable. Both have their advantages and disadvantages for the potential borrower, particularly those with poor or bad credit. But with careful research and planning, it will be a less stressful process.
To begin with, understand what home equity is. Home equity is what your house is worth, less the amount you owe on your mortgage or other loans. The value of your home can go up or down, depending on market demands, location and other factors. Also, you can raise the value of your home by making additions such as a backyard deck, an extra bedroom, kitchen upgrades, etc.
Although many experts recommend leaving the equity in your home until it is really needed, situations arise that warrant removing some of the equity from your home in the form of cash: home improvements, college tuition, the need for a new car or the purchase of additional property. Which brings us back to choosing between a home equity loan and a reverse mortgage.
An equity home loan removed some of the equity in your home in the form of cash and can be administered as either a home equity loan (issued in the form of a lump sum) or a home equity line of credit (equity that can be withdrawn in installments as needed by the borrower). The interest on these types of loans is often tax deductible and the interest rates with these loans are commonly lower than most other types of loans. Both of types of equity loans are repaid monthly with payments comprised of the principal and the interest. Should you default on a home equity line of credit or home equity loan, you run the risk of having your home foreclosed on by the lender.
A reverse mortgage provides you with either a lump sum (like a home equity loan) or a line of credit (like a home equity line of credit) but is not repaid in monthly payments. A reverse mortgage, instead, is repaid upon the death of the borrower or borrowers or when they relinquish the home as their main place of residence. Unlike a home equity line of credit or home equity loan, a credit score does not matter when it comes to a reverse mortgage. Instead, the applicant’s age and the value of their homes are the main qualifiers for a reverse mortgage.
So which loan is right for you? There are factors that can help you decide. First, if you do not qualify for a reverse mortgage, a home equity loan or home equity line of credit may be your only other option. If you do not require a large amount of money and plan to pay off the loan as soon as possible, a home equity loan or home equity line of credit may be the best way to go. A home equity loan or home equity line of credit may also be the best option for you if you plan on moving out of your current home in a relatively short period of time after taking out the loan. Finally, the interest on these types of loans may be tax deductible.
A home equity line of credit or home equity loan is also a good option if you are in a process of conducing a major home project like a room addition or much-needed repairs, projects that can potentially include unforeseen costs.
A reverse mortgage may be the best option for you if you, of course, qualify, if you desire to bolster your retirement savings, if you can’t afford or don’t wish to make monthly payments or if you’d like to have money available for emergencies. Also, the income you may earn from a reverse mortgage can be tax free under certain circumstances.
There are also possible detriments with each option. For instance, with a home equity loan or home equity line of credit, the better your credit, the better your chances of being approved. And with a reverse mortgage, the closing costs can be expensive and you stand the chance of leaving less property and cash to your family in your will.
Also, borrowers seeking a reverse mortgage, usually seniors, often fall victim to predatory brokers and lenders who attempt to saddle them with additional loan add-ons that may result in more money for the lender and unnecessary costs for the borrow. Homeowners considering a reverse mortgage should consult with a trusted family member or friend who is familiar with the process, or get help from a tax professional before signing any documents.
Do your homework and study the benefits and potential problems with equity loans and reverse mortgages and find the best deal for your situation and needs.
