Many people are converting their illiquid equity in their home to liquid equity so they can use it for a multitude of reasons.
There are two ways to do that:
1. HELOC-Home Equity Line of Credit and
2. HECM-Home Equity Conversion Mortgage.
The HELOC is the most understood method of tapping your equity. It basically is the home equity loan that people have been using for years.
The HECM is the least understood method. This is the new reverse mortgage loan; it also has been around for years, but recently has undergone many changes and improvements.
The differences include:
- The reverse mortgage has no requirement for a credit score and-or a minimum income qualification.
- The reverse mortgage is a non-recourse, FHA-insured loan. This provides major benefits to the borrower.
- The reverse mortgage has no monthly or other mortgage payments required - ever.
- The reverse mortgage provides that, since FHA insures the loan, a mortgage insurance premium goes directly to the government.
- With the reverse mortgage, the available but unused equity grows in a line of credit at 1.25 percent above the current interest rate. There is no term. It continues to grow as long as the borrower lives in the house.
- With the reverse mortgage, there is no expiration or call date.
In summary, the home equity line of credit loans produce less of a financial benefit to a borrower with much more risk than a reverse mortgage. If you miss your HELOC payment, you might have to sell your home or go into foreclosure.
With a reverse mortgage, there's no such penalty as long as you continue to pay your taxes and insurance - which would also be required to keep any other type of loan on "active" status. Payments simply aren't required or expected until you're permanently out of the home.
Also, unlike other types of loans, reverse mortgages require third party credit counseling in order to be eligible to get one. The counselors must be HUD-approved and will tell the borrower everything there is to know about them.
Borrowers will be expected to correctly answer some questions about reverse mortgages to the counselor to insure that the borrower understands how it works. They sign documentation noting what was discussed at the application, during the credit counseling and again, at closing.
This regulation is much tougher than a conventional loan process. It is specifically designed so that borrowers will be fully informed and aware.
Both products have a use and are best for different circumstances. For many people, the HECM, or reverse mortgage, loan is clearly the best alternative. Unfortunately, many individuals have not investigated it because of skepticism and misunderstandings.
Do yourself a favor and consider both before making a decision.
Don Davis is a reverse mortgage specialist with Yadkin Mortgage, a Division of Yadkin Bank. don.davis@yadkin mortgage.com