Is a HELOC or Reverse Mortgage Better for Aging Homeowners? 5 Scenarios Examined
When an aging homeowner starts thinking about financial security, they often wonder how their home can help them cover potential costs now and in the future.
Both a home equity line of credit (HELOC) and a reverse mortgage could work, but which one is better?
Quick Rules of Thumb: HELOC vs Reverse Mortgage
Both a HELOC and reverse mortgage can give the homeowner access to funds when they need them. But each could benefit the homeowner differently.
A HELOC is best for someone who wants to avoid huge closing costs and can afford a monthly payment.
A reverse mortgage is best for someone on a tight budget that can’t make a payment – and wants to eliminate the chance of leaving their heirs with a mortgage to pay off when they die.
Let’s look at 5 scenarios to see which option might suit the homeowner best.
Scenario 1: 80-Year-Old Homeowner In Decent Health
A homeowner just turned 80. He is in reasonably good health so far but may need in-home assistance or a nursing facility eventually. He wants funds available just in case costs exceed his fixed income in the future. He owns the home free and clear.
His income can qualify him for a HELOC. Still, he doesn’t have a lot of extra funds to make a payment.
To save the stress of a payment, this homeowner might choose a reverse mortgage. He can choose a credit line so he can draw funds when he needs them. If he moves into a nursing facility for more than 12 months, the reverse mortgage becomes due and payable. If he chooses a HELOC, someone would have to make the payments. But it would not need to be paid off if he moves into a facility.
Scenario 2: Retired Homeowner with a Small Mortgage Payment
A homeowner just turned 75. She is retired and is making a mortgage payment of $1,000 per month. She would like to eliminated that expense. She plans to live in the home as long as possible.
This homeowner would not benefit from a HELOC, since it would require a payment. Assuming adequate home equity, a reverse mortgage can pay off the existing mortgage and leave her with no payment. She would just need to pay property taxes and homeowner’s insurance. This could free up her budget for future increased expenses such as medication and in-home care.
Scenario 3: Renovation Financing
A married couple, ages 65 and 63, needs $50,000 to add accessibility improvements and update certain areas of the home. They have income from part-time work and retirement.
While someone 62 or older can qualify for a reverse mortgage, a HELOC could be better in this case. Reverse mortgage closing costs could be $15,000 or more, a high price to pay to access $50,000. Some HELOCs come with zero closing costs. The couple should make sure they can handle the HELOC payment.
Scenario 4: Homeowner Wants to Make It Easy on Her Heirs
A 78-year-old homeowner fears saddling her children with an “underwater home” – one where the mortgage balance exceeds the property value. Home prices are declining in her area.
Most reverse mortgages are insured by the federal government so that heirs can simply hand over the property to the lender without owing any money. With a HELOC, heirs may need to pay off the loan balance if the home sale cover it in full.
Scenario 5: Adult Children Considering the Future
Two adult children are looking at options to help their parents, both around 80 years old. They think that in a few years, one or both of their parents may need full-time care. The parents’ home is paid off. The parents have savings, but not enough to support years in an expensive nursing facility. Should they help their parents get a reverse mortgage or HELOC as a backstop for potential nursing facility costs in the future? Or, hope that their parents’ savings are enough? They would like to keep the home as an investment property after their parents pass away.
A reverse mortgage could backfire if both parents end up in a nursing home for longer than 12 months. The loan would become due and payable, so the children would have to either pay it off, sell the home, or let the lender foreclose. However, a reverse mortgage would work fine to fund in-home care. The loan would have to be paid off when their parents pass away. A HELOC would save $15,000 or more in closing costs and would not become due and payable if the parents moved out. Like the reverse mortgage, the loan would have to be paid off or refinanced into the adult children's names to keep the home after the parents pass away.
Difficult Decisions
If you read through the scenarios, you discovered that there’s rarely a black-and-white answer. It’s best to meet with a financial advisor to review your circumstances, whether you are looking for solutions for yourself or someone else.
HELOC Pros and Cons
Pros
Low or no closing costs
No age requirement
You need less equity in the home
Cons
Monthly payment required
Heirs must pay off the loan when the homeowner dies, even if it’s more than the home value
Homeowner needs good credit and income to qualify
Reverse mortgage Pros and Cons
Pros
No payments due
Insured in case balance exceeds property value at time of death
No liability for heirs
Easier credit and income qualification
Can make optional payments
Can take money in a lump sum, monthly payments, and/or line of credit
Cons
Very high fees
Need hundreds of thousands of dollars in home equity
Available to homeowners 62+
Due and payable upon death or vacating the home
Loan balance grows monthly unless payments are made
HELOC or Reverse Mortgage? Get Expert Advice
Financial tools can be extremely useful but just as confusing. Get expert advice and make the best choice for your needs.
Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
