Reverse Mortgage vs HELOC (Home Equity Line Of Credit)

Quite often the decision about whether or not to get a reverse mortgage involves choosing between this and a Home Equity Line Of Credit (often called a ‘HELOC’).

Well we believe we have come up with the perfect solution to this debate. But first…

ADVANTAGES AND DISADVANTAGES OF BOTH

Firstly, let me point out what you probably already know in that a Home Equity Line Of Credit has significant disadvantages:  you are still required to make the monthly interest payments, you could still lose your home if you do not keep up payments, you could end up owing more than what your house is worth in the event of a housing market crash and you need to have income and supporting credit to qualify for it.

However, the one ‘advantage’ that a Home Equity Line Of Credit (HELOC) has is that it doesn’t eat into the equity of your home – the inheritance you’d be leaving for your family.  That is, for every $100 of interest in a CHIP reverse mortgage, the equity (which is the amount of your home that you actually own) decreases by $100.  This is not the case with a Home Equity Line Of Credit as you’d be repaying this $100 every month instead.

So, we came up with a solution that balances all the benefits of a CHIP reverse mortgage and all the benefits of a Home Equity Line Of Credit too.  

Turning A Reverse Mortgage Into A Home Equity Line Of Credit

We regularly advise our clients that they can create a product themselves that has all the benefits of a HELOC with none of the down-side.  How?

What people don’t consider is that you can make voluntary repayments to the reverse mortgage – including repaying the interest.

So what you can do is set up a manual repayment every month to pay the interest on your reverse mortgage.  That way, exactly the same as with a HELOC, the balance owing will never increase as you are covering the interest.  You are basically ‘creating’ a Home Equity Line Of Credit by doing this.

We call this ‘The Reverse Mortgage Home Equity Line Of Credit’ (RMHELOC).  Such a product doesn’t exist, you are manually creating it by making this voluntary payment of the interest each month.

With a ‘RMHELOC’ you get all the benefits of a Home Equity Line Of Credit with none of the down-side…

 

Summary Table

Here is a quick summary of what we’re talking about and what you need to think about when deciding between these 2 products:

Other Ways To Use Your Home Equity

For more detail on exactly what is a reverse mortgage and how it differs in full to a Home Equity Line of Credit – please download our free CHIP reverse mortgage guidebook.

The following article also discusses different ways to use the money:
https://www.reversemortgagepros.ca/8-interesting-ways-to-use/.

In addition to consider how to use this, compared to a HELOC, this article looks at the costs involved for both:
https://www.reversemortgagepros.ca/costs-and-fees/.

So Why Would You Take Out A HELOC?

This is the big question.  In reality, if you are under 55 or want more money out of your home than you qualify for – then these are the main 2 reasons you should consider a HELOC.

If you are over 55, you could set up the above ‘RMHELOC’ strategy and get all the benefits of a HELOC with none of the down-side.  It just requires a little bit more work to set-up since you are voluntarily making these payments.  However, this gives you increased flexibility in that the payments are voluntary.  You can choose to ‘borrow’ more equity from your home at any point by not making this payment.

So for those of you who are stuck between comparing a reverse mortgage vs HELOC – we hope you’ll consider the above product that we invented: The ‘RMHELOC’ – the basis of which we explained in this article.