Home Equity Lines of Credit or HELOCs are probably the closest alternative to a reverse mortgage yet they are very different.
A HELOC is a loan secured by your home. It is registered just like any mortgage and requires a minimum of interest only payments each month.
HELOC’s have a couple of great advantages over regular and reverse mortgages. First off, the product is re-advanceable. This means that you can access your home equity whenever you like and pay back as much as you want at any time. Think of it as a credit card for your home.
HELOC’s are open terms meaning that you can pay them off at any time and without penalty. There is no pre-payment limit like a regular mortgage.
Interest rates are often lower than reverse mortgages, unsecured lines of credit, bank loans, and credit cards. The rates are based on the bank’s prime lending rate. As this article is being written, current HELOC rates are Prime (3.95%) +.5% = 4.45%
The minimum required interest-only payment is usually fairly small in relation to your balance which is due to the lower interest rate. The payment, however, will increase or decrease as prime rate fluctuates.
We often suggest HELOC’s for individuals who require short term financing. Short term meaning that they have the ability to pay off the loan in less than 1 year. We also want to make sure that their income and budget can support the monthly payment obligation while the loan is being used.
Qualifying for a HELOC is a real challenge today. The “stress test” introduced in 2018 means that have to qualify at 2% higher than your actual rate. For example, if the rate you receive on your line of credit is 4.45%, you have to demonstrate that you could make payments (based on your income) if rates rose to 6.45%. On average, the stress test reduces your borrowing power by up to 20%.
Qualifying for a reverse mortgage is much easier. Rather than focusing on your income, lenders approve you based on your age, home type, location, and home value.
We are happy to book a telephone conversation to help you determine which is a better fit. Please call us at 604-334-8993 or request a call back for your convenience.
Next week we explain how you can obtain a complimentary quote within 10 minutes.
