Home Equity Line of Credit vs Reverse Mortgage Line of Credit
What are the differences and similarities between a reverse mortgage line of credit and a home equity line of credit?
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| HELOC | RMLOC |
|---|---|
| Requirements for income and creditworthiness. | No requirements for income and credit score. |
| Homeowners must still make monthly payments to repay the loans. | No required monthly payments from the homeowner: Homeowner can receive proceeds from equity*. |
| The homeowner is still responsible for real estate taxes, insurance, and maintenance. | The homeowner is still responsible for real estate taxes, insurance, and maintenance. |
| Foreclosure possible if the borrower does not make scheduled payments. | Becomes due and payable if specific requirements are not met. |
| Must be repaid on a specified monthly schedule during the term of the loan. | Does not need to be repaid until the borrower passes away; the dwelling is transferred, or the borrower ceases to occupy the dwelling as a principal dwelling*. |
| Terms based solely on creditworthiness, income and equity. | Proceeds based on the age of the youngest borrower, home value, and interest rate. |
| A home equity loan is a loan that must be repaid. | A reverse mortgage is non-recourse loan so the responsibility of repayment is transferred to the property instead of the homeowner*. |
| Can be reduced, frozen or payment demanded. | Can never be reduced, frozen or payment demanded. |
| No impact on eligibility for benefits because an equity loan is a debt, not income. | Should NOT impact the borrower’s eligibility for Medicaid and SSI because a reverse mortgage is NOT considered income. |
| Left unused, the credit line remains stagnant and does not grow. | Left unused, the credit line grows annually. |
| HELOC limit is NOT guaranteed to increase. | Guaranteed to increase 3-5% a year |
| Heirs carry liability to repay. | The house owes the balance, not a person and not the heirs. |
| Home equity is NOT protected from a market correction. | Home equity IS protected from a market correction. |
*Must live in the property six months or more a year, pay property taxes and home owner’s insurance and maintain the home.
