Do You Prefer HELOC or Reverse Mortgage?

HELOC vs. Reverse Mortgage
Below is a link to a worthwhile article comparing a traditional home equity line of credit (HELOC) and a reverse mortgage line of credit, called a Home Equity Conversion Mortgage (HECM) in the lending industry. It is worth noting that the HECM never expires and grows monthly indefinitely, even of the property drops in value. A standard HELOC is only available for 10 years and then converts to principal and interest payment. The line can also be cut by the lender if the lender decides the value of the property has dropped.

Here’s the article. It is worth noting that his annual rate of 4% growth is far too low. A more likely rate would be at least 5.45% to start (LIBOR index of 1.7% + margin of 2.5 + mortgage insurance of 1.25%) and would almost certainly increase over time since rates are still near historical lows. DS Consulting expects the average rate to be 6% or more over the next 20+ year.

Using a 6% rate rather than his 4%, the value of the line when the borrower is 80 would be about $550,000 rather than $400,000 and over $1 million when the borrower was 90. If the value of the home is less than the $1 million, the borrower could withdraw his $1 million, then sell the home and FHA would cover any loss and the borrower’s credit would be untouched.

The article does not address the potentially high closing costs for a reverse mortgage, but there are easy options on the structuring of the transaction to avoid most, sometimes all, of those costs. The author, Tom Davison, is a wealth manager in Columbus Ohio and often writes about reverse mortgages and how they might fit into an individual’s retirement planning.

Want to learn more about reverse mortgages? We will give you straightforward information, and include family and attorneys by conference call if you’d like. We are all about transparency. We’d love to have your business.

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La Mirada, CA 90638
Phone: 562-902-2677


Dennis Sanchez
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DS Consulting
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