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Sometimes life hits us with unexpected expenses, or expenses that sneak up on us. Usually, this means that we need a loan from the bank. With all the available options of getting a loan, how do you know what it the right option for you? As a homeowner, you have the ability to leverage your home in a few different ways to access those funds. Using your home as collatoral, you can apply for a reverse mortgage, a home equity loan, or a home quity line of credit to help you free up some cash flow.

When it comes to your finances, there is no cookie cutter solution for your needs. It would be impossible to tell you which option, a reverse mortgage, home equity line of credit, or home equity loan is best for you without a conversation. It is, however, possible to rule out some of these loan types simply based on your timelines and preferences of flexibility. To get a better idea of the differences between a reverse mortgage, a home equity line of credit, and a home equity loan, refer to the chart below!

Reverse Mortgage

  • Quality based on home equity, location of property, current interest rates, home’s appraisal value, and homeowner age, (all land title owners must be 55+ to qualify.
  • Up to 55% appraised value of home.
  • Guaranteed –  lender cannot reduce or close the reverse mortgage line of credit.
  • Amount increases every month by a predetermined amount based on previous month’s balance and interest rate. Unique feature that lets borrower access more funds each month.
  • Adjustable loans usually based on LIBOR index with a ceiling of 5-10% depending on the product chosen at closing.
  • No monthly payments, therefore no danger of defaulting by not making mortgage payments.
  • High initial costs. Not advised for owners planning on moving within a couple years.
  • Borrower must continue to pay their real estate taxes and insurance.

Home Equity Line of Credit

  • Qualify based on credit, available equity, debt and income, owners must apply and be approved by their lender.
  • Up to 65% appraised value of home.
  • No Guarantee – bank can close or reduce at any time.
  • Payments fluctuate depending on the amount of  money pulled from the loan. Remember, a HELOC is similar to a credit card so your payments mirror this model.
  • Adjustable loan usually based on Prime Rate increases. Interest rates may fluctuate.
  • Monthly payments increase considerably and loan must be paid back over 20 years.
  • Initial costs are much lower than a reverse mortgage, HELOC is a better option for those moving within a couple years.
  • Borrower must continue to pay their real estate taxes and insurance.

Home Equity Loan

  • Qualify based on credit, available equity, debt and income, owners must apply and be approved by their lender.
  • Up to approximately 60% of the appraised value of the home. Usually, lenders require borrowers to own over 20% of the home to qualify.
  • Guaranteed –  the lender cannot reduce the amount or close the loan because the funds come as a lump sum.
  • Payments are consistent each month, that includes the agreed upon amount as well as the interest rates.
  • Non-adjustable loan, meaning the payment and interest rate is fixed and does not change throughout the loan agreement.
  • Monthly payments are consistent, there are no surprises with your loan.
  • Initial costs can be quite high.
  • Borrower must continue to pay their real estate taxes and insurance.

Reverse Mortgages – The Basics

A reverse mortgage is exactly what it sounds like – instead of you paying to the lender, the lender pays to you. This payment is based on a percentage where you can borrow up to 55% of the home’s appraised value. Your debt will increase as your equity in the home will decrease. A reverse mortgage means that the lender is purchasing the home’s equity from you. You will continue to be the official owner of the home with your name on the land title, but once you have moved out of the home for over a year, have sold the home, or have passed away, the loan must be repaid. The lender will likely sell the home in order to recover the money you owe, and any equity that’s left over will go to yourself or to your heirs. A reverse mortgage is ideal if you are not planning on moving anytime soon, you can afford the property tax and insurance necessary, and if you or your spouse is over the age of 55.

Home Equity Loans (A Second Mortgage)

Receive a loan as a single lump-sum payment and make regular payments to pay off the principal and interest. Payments are consistent each month until the end of the term set by the lender and usually last from five to 15 years. Commonly referred to as a second mortgage, this loan type is a comfortable solution for many home owners. As mentioned above, it is a stagnant loan where payments do not vary, making it a controllable loan form. A home equity loan is ideal for those who have an emergency, such as large hospital bills, or making big renovations that will increase the value of your home.

HELOC AKA Home Equity Line of Credit

A home equity line of credit works more so as a credit card. The lender will set a credit limit and the borrower can access it when they need it. Interest is paid only on the amount that is used throughout the loan. This differs from a home equity loan where borrowers are charged interest on the entire amount regardless if it’s used or not. As an adjustable loan, monthly payments have the ability to change and interest rates may fluctuate. This is a great option for people who need to access cash flow at certain intervals, for example paying for fall and winter tuitions at their child’s University. 

Reverse Mortgage

  • Must be 55+ to qualify (if owner has a spouse on the land title, they also must be 55+), home equity, where you live, current interest rates, etc. 
  • Up to 55% appraised value of home.
  • Guaranteed –  lender cannot reduce or close the reverse mortgage line of credit.
  • Adjustable loans usually based on LIBOR index with a ceiling of 5-10% depending on the product chosen at closing.
  • No monthly payments, therefore no danger of defaulting by not making mortgage payments.
  • High initial costs. Not advised for owners planning on moving within a couple years.
  • The borrower must continue to pay their real estate taxes and insurance.

Home Equity Line of Credit

  • Qualify based on credit, available equity, debt and income, owners must apply and be approved by their lender.
  • Up to 65% appraised value of home.
  • No Guarantee – bank can close or reduce at any time.
  • Payments fluctuate depending on the amount of  money pulled from the loan. Remember, a HELOC is similar to a credit card so your payments mirror this model.
  • Adjustable loan usually based on Prime Rate increases. Interest rates may fluctuate.
  • Monthly payments increase considerably and loan must be paid back over 20 years.
  • Initial costs are much lower than a reverse mortgage, HELOC is a better option for those moving within a couple years.
  • Borrower must continue to pay their real estate taxes and insurance.

Home Equity Loan

  • Qualify based on credit, available equity, debt and income, owners must apply and be approved by their lender.
  • Up to approximately 60% of the appraised value of the home.
  • Usually, lenders require borrowers to own over 20% of the home to qualify.
  • Guaranteed –  the lender cannot reduce the amount or close the loan because the funds come as a lump sum.
  • Payments are consistent each month, that includes the agreed upon amount as well as the interest rates.
  • Non-adjustable loan meaning the payment and interest rate is fixed.
  • Monthly payments are consistent, there are no surprises with your loan.
  • Initial costs can be quite high.
  • Borrower must continue to pay their real estate taxes and insurance.

Questions?

Do you need to free up some money? Don’t hesitate to ask me any questions.
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