It is a good feeling to have a house that is paid in full. However, if a home owner with high equity finds himself or herself short of cash, borrowing against the house is less expensive than a typical consumer loan. Setting up a HELOC or a reverse mortgage can create a low-interest rainy day fund for home owners with high equity. (I do not recommend this for home owners who are already carrying high mortgages.)
What do Home Equity Lines of Credit (HELOC) and a reverse mortgages do?
- Both allow you to borrow against the equity in your house.
- Both have interest rates that are in line with mortgage interest rates.
- Both charge no interest unless you carry a balance.
- The amount of the line of credit that you use is in your control. There is no requirement that you carry a balance.
The differences are that with a reverse mortgage
- You must be 62 years old or older to qualify.
- There are no income qualifications.
- You never have to make a payment.
- It can never be foreclosed.
- There is no term (most HELOCs last 10-15 years, then you must repay the balance.)
- Interest rates are somewhat lower. Closing costs are a bit higher. If you lock into a good rate, you can keep it the rest of your life or until you sell the house.
- The loan amount is generally larger than allowed on a HELOC.
- A HELOC can be a vehicle to free up cash for your next purchase. Then, when you sell your current property, you can pay it off.
- For retirees without income, a reverse mortgage can pay for the down-sizing property. Then you can sell your current house and owe nothing. Downsizing is really down-costing. Some seniors are stuck between a rock and a hard place because they don’t have the cash or the ability to borrow so that they can move to a less expensive living situation.