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 mortgage – including repaying the interest.
So what you can do is set up a manual repayment every month to pay the interest on your 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.
THE info is good BUT you did not enter the subject of other loan i have such as my truck and my wife’s car which I owe monthly payments at no interest. So why is this included in the HELOC ?? and they want me to pay interest.this way I have a bigger debt to pay back. So should I proceed with this HELOC? I just wanted the money to travel but my credit card will cover that but I still have an interest payment which is lower.it is more confusing when you don’t know the questions to ask.
Hi Bryan
You can choose to keep those other loans or pay them off – it is totally up to you. However, at some point those might actually start incurring interest and you might want to pay them off (either through a HELOC or reverse mortgage).
Feel free to ask any questions you like!
Thanks,
Mich
What happens if you sell your house?
Hi Robert
If you sell your home, you’d pay off the reverse mortgage using the proceeds from sale and keep anything left over. This process is exactly the same as you’d go through with a ‘normal’ mortgage on the home – or any kind of mortgage or HELOC on the home.
Thanks,
Mich
What would be the total final payment on a ‘reverse mortgage’ after borrowing $240000 and handing over my current $146 000 mortgage (currently at 2.7%) for the reverse mortgage over 5 years if I paid $100/month to try and offset the loan.? I cannot seem to get any response that really answers that question. I just want facts and figures.
Hi Jackie
The $240,000 would be around $300,000. There would be no final payment, assuming that you sell the house to pay the mortgage. And, of course, if your home appreciates enough, there may also be no loss of home equity. I would suggest you check out this article on the underlying numbers for a reverse mortgage: https://www.reversemortgagepros.ca/rates-and-penalties/
Thanks,
Mich
I am retired, I live on a pension, my home is valued at $250,000.00. I understand the idea of CHIP, what concerns me is that if I should that out a Reverse Mortgage to use as I wish, I have no way to pay the monies owing back to CHIP. I expect to live at least another 20 years in my home… The understanding I have is, should I take out a $100,000.00 CHIP Mortgage and assume a flat 5% interest for the life of the loan over 20 years, using compound interest the value of the loan would now reach approximately $200,000.00. Speculation is that 5% is very nominal, and would expect interest rate in the range of 6 to 9% based on current economy, and there is no guarantees that interest rates can not go higher and would inflate the mortgage owed to $250,000.00 or higher. Is there some sort of tangible proof there will be a residual value in the home… Not everywhere in Canada is like Vancouver or Toronto where house prices double every second year… Do you have proven CHIP loans reflecting loan guarantees and home sale prices for review?
Hi John
I appreciate the message – let me clear up a few things for you:
– You would never have to repay the mortgage, as long as you’re alive. Repayment while alive is completely voluntary.
– I can tell you as a licensed mortgage professional that I know it to be a fact that 99% of homes have a residual value when the reverse mortgage is removed.
– Let me take your exact example and look at the numbers. You say your home is worth $250,000 just now. In the 20 years – even at 1% growth (which is well below 20 year growth rates outside of Toronto and Vancouver), your home would be worth roughly $308,000. That’s a very conservative estimation, using 1% growth. So the reduction in your equity is not as bad as you think it could be – even over 20 years.
Hope this helps with your decision.
Thanks,
Mich