Before you can decide whether a reverse mortgage loan is right for you, it is necessary to understand your home equity. Equity is the current market value of your home minus any outstanding loans. So if you own a $300,000 home, you have $200,000 in equity. In other words, you have more equity than the home is worth. Your equity is essentially the difference between the market value and the price you owe on the home.
Home equity line of credit vs reverse mortgage
When comparing a reverse mortgage vs a HELOC, there are some key differences between the two. While reverse mortgages do not require payments while the homeowner is still living, home equity loans require payments. Because they are considered a second mortgage, home equity rates are higher than first mortgages. As a result, home equity rates tend to be slightly higher than today’s mortgage rates.
The main difference between HELOCs and reverse mortgages lies in their terms. With a HELOC, you will have to make monthly payments to the lender, and failure to pay can damage your credit. A reverse mortgage, on the other hand, is guaranteed by the HUD, so it will not default on repayments. A reverse mortgage requires no monthly payments but requires you to pay taxes and insurance. While HELOCs are cheaper to establish, a reverse mortgage is more costly to obtain.
Reverse mortgage loan payment options
Reverse mortgage loan payment options include the lump-sum option, line of credit, monthly payout, and modified tenure. Each has its benefits and disadvantages, but each offers a different amount of available funds. In addition, there are additional risks associated with each option, especially if you’re younger and don’t have enough savings to meet monthly repayments. Also, the loan payment options are only available for Home Equity Conversion Mortgages (HECMs).
One of the biggest benefits of reverse mortgages is that you can choose to receive your money in one lump sum or as a line of credit. In both cases, you will receive interest on the loan and the origination fee. However, there are costs involved, including a set-aside fee for the appraisal and home approval. Regardless of your choice, you should fully understand your options before making a decision.
Interest rates
Reverse mortgage loans have two types of interest rates: adjustable and fixed. Unlike adjustable rates, which are based on market conditions, fixed rates are not tied to published interest rates. Adjustable reverse mortgages, on the other hand, have interest rates that fluctuate based on a market index, called LIBOR. LIBOR, which stands for London Inter-Bank Offered Rate, is a popular alternative to Treasury rates.
Adjustable and fixed interest rates are used to determine the monthly payments of HECMs. Adjustable HECMs fluctuate according to the market. Index and margin rates are used to calculate adjustable rates. The average fixed rate for a HECM in December 2016 was 5.060%, according to the National Reverse Mortgage Lenders Association. However, the rate you pay will depend on many factors and could vary from lender to lender.
Non-recourse clause
A “non-recourse clause” in a reverse mortgage loan limits the lender’s liability to the value of the home when the loan is due. Most reverse mortgages have a non-recourse clause that protects the borrower and limits the lender’s liability to the value of the home at the time of the loan’s due date. This clause prevents lenders from going after the borrower for the remaining loan balance.
A Reverse Mortgage with a Non-Recourse clause guarantees that the maximum amount owed on the loan will be the appraised value of the home in the year 20. After the loan is due, a beneficiary may sell the home to pay off the remaining balance or take the proceeds as an inheritance. Otherwise, the heirs may refinance the loan with another loan to pay off the loan balance. However, this clause should not prevent borrowers from taking out a second loan if they have the financial capacity to repay the loan.
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