Reverse Mortgage Loan or Home Equity Loan - A Comparison
A reverse mortgage is a home loan taken out by a home owner who is 62 years or older and that generally requires no loan payments for as long as the borrower owns and remains living in the house. A reverse mortgage prohibits the homeowner from having other loans or liens on the house. A home equity loan is a home loan taken out by any borrower, regardless of age, that must be repaid in monthly installments.
The chief difference between a reverse mortgage and a home equity loan is that the reverse mortgage requires no monthly mortgage payments. Interest accrues and compounds on the loan until it becomes due, when the home is sold, or when the homeowner moves out for a period of 12 consecutive months or dies, Default could also cause the loan to become due and paylable. The loan is generally repaid from equity through the sale of the house. The reverse mortgage allows seniors who lack liquid assets but own a home to tap into their home equity, allowing them to maintain a comfortable standard of living for their remaining years. With a home equity loan, monthly payments are made until the loan is repaid, the interest rate is usually variable and the term of the loan is usually no longer than 30 years. This type of loan is suited to borrowers with sufficient income or assets to make monthly payments. With a Reverse Mortgage Loan repayment is deferred until the borrower dies, sells the home or defaults on other obligatons such as insurance payments or taxes.
A qualified home owner of any age may take out a home equity loan. Only borrowers age 62 or older may take out a reverse mortgage. Requirements for a home equity loan include good credit and a steady, documentable income sufficient to make the loan payments as well as meet other financial obligations.
For a home equity loan, the maximum loan amount is generally restricted to equity over 20 percent. For example, if the borrower has 40 percent equity in the house, he can borrow up to 20 percent in the form of the loan. The amount of equity a reverse mortgage borrower requires is dependent on factors such as the loan interest rate, the home value, the loan type--lump sum, credit line or monthly payments--and age. The younger a borrower is, the more equity he needs to qualify for a reverse mortgage. Generally a 62-year-old borrower would need at least 50 percent equity. In this case a 50 percent loan would be approved but it would go to pay off the 50 percent debt owed on the mortgage. To take out the full 50 percent equity in the house in cash, the property owner would have to own the property free and clear of any loans when applying for a reverse mortgage. Still have questions for us? Click our contact us page for details.