Home Equity Loan Or Reverse Mortgage? Which is the Best, Or Easiest, For You to Obtain?

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A Home Equity Line of Credit (HELOC) can be an easy and inexpensive way to access funds for emergencies, home improvements, vacations or even ongoing monthly expenses. Qualifying guidelines for the HELOC used to be based on the value of the property being placed as security for the loan and little else.

Due to the banking changes we have all witnessed over the past two years, lenders are tightening up their underwriting guidelines and now scrutinize every application. Today, an applicant for a HELOC will be asked to provide proof of income and a very good credit report along with a current appraisal (ordered by the bank) justifying the value of the property. Your bank may allow a “Loan to Value” or a “Combined Loan to Value” for as much as 70% of the value. The income and monthly financial obligations of the borrower will be closely analyzed by the lender. Your bank will tell you how much of a loan you can qualify for. If the lenders guidelines are met the loan will be approved and a closing scheduled.

A Home Equity Loan is repaid thru several possible methods. Monthly interest only payments or interest added to the balance with a balloon payment due at a future pre-determined date are common. Your bank will tell you what options are available to you.

The up front costs for a home equity loan are usually minimal and could include the appraisal fee and the fee necessary to obtain a credit report. Your lender will discuss these costs with you as well.

A Home Equity Conversion Mortgage (HECM), commonly called a Reverse Mortgage, is a Federal Insured mortgage that can be an alternative way to access funds for emergencies, home improvements, vacations or even ongoing monthly expenses. This is a loan that has very few requirements.

FIRST, the borrowers must be at lease 62 years of age.

SECOND, the borrowers must reside in the property as their primary residence.

THIRD, the value of the property vs. the LOAN amount must meet the Federal guidelines as established by FHA.

FOURTH, the borrowers cannot have any Federal liens against them.

Your Credit History or Income is not considered in the approval process. This is most beneficial because lots of folks looking for this type of financing may be on limited income and may have past credit issues that would stop the traditional HELOC transaction. No monthly payments are required so qualifying income is not considered.

The HECM loan is only repaid when the last surviving person on the mortgage moves permanently from the home, no matter how long the parties reside there. The amount repaid will be the original borrowed amount plus interest and a monthly service fee charged by the lender. This means that when the loan comes due your balance owing will be higher than the original amount.

The Initial Costs to obtain a HECM loan are minimal. An appraisal fee and a mandatory counseling fee, paid to an independent (FHA Approved) Reverse Mortgage counseling service, are all that’s necessary. These items are often financed in the loan amount so that the client needs no initial investment in the process. Because this is a Federally Insured Mortgage the client cannot be charged any fees, or even complete the application process, before the Counseling has taken place.

TOTAL CLOSING COSTS for this type of loan are quite high. In addition to the FHA Mortgage Insurance premium, there will be all of the closing cost associated with taking out a normal mortgage. Accurate closing cost, based on your individual circumstances, will be provided to you PRIOR to your beginning the application process.

IN SUMMARY: Based on your circumstances, both types of accessing some of your home’s equity can be beneficial. Ask lot’s of questions, involve others you trust and get the facts before making any decision.

For 40 years I have been helping people just like you become homeowners and/or refinance their properties in order to reach their financial goals. I am 67 years of age, I have experienced many of the problems associated with folks in our age group and I understand, better than most, our concerns.

Getting the loan is easy, deciding what to do with the money, now that’s the question.

Jack McKenzie, Reverse Mortgage Specialist
Serving California from my office in San Diego.
Ph: 858-248-3311
For late night viewing please visit my web site at www.careverseloan.com

October 28, 2009