Home Equity Line of Credit – HELOC, The Truth About, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Home Equity Line of Credit

Reverse mortgage disadvantages

A HELOC , or home equity line of credit, is a type of home loan that allows a borrower to open up a line of credit using their home equity as collateral.

It differs from a conventional home loan for several different reasons. The main difference is that a HELOC is simply a line of credit a homeowner can draw from, up to a pre-determined amount set by the mortgage lender, whereas with a typical mortgage, the amount borrowed is the total amount financed.

In other words, a HELOC is a lot like a credit card because of its revolving balance nature. When you open a credit card, the bank sets a certain credit limit, say $10,000. You don t need to pay interest on the total amount, or even withdraw or spend any of the $10,000, but it is available if and when you need it.

That s also how a HELOC works. Your bank or lender will give you a line of credit for a certain amount, say $100,000. And you can draw upon it as much or as little as you d like, up to that $100,000, if and when you want.

Generally, you will be required to make an initial minimum draw, say $10,000 or $25,000, depending on the total line amount. This ensures the bank actually makes money on the transaction, and doesn t just give you a line of credit you never touch.

At that point, you can borrow from it, pay it back, and then borrow again. Or never touch it and just set it aside for a rainy day.

Additionally, most HELOCs allow you to make just the interest-only payment, instead of having to pay back the principal. This keeps payments low while also giving homeowners access to much needed cash.

It s a flexible choice because you get the option to use the line of credit if you need it, without having to pay interest if you don t.

Most people use the funds to pay for things like college tuition, home improvements, higher-interest rate debt, or to fund another home purchase.

Accessing Your Funds with a HELOC

Once your HELOC is open, you ll have a variety of options to access the funds.

Most banks will provide you with an access card that works kind of like an ATM debit/credit card. You can make purchases with it and/or withdraw cash at a branch location.

You may also be given the option to transfer funds to a linked bank account, or be given checks that can be written to anyone for any purpose, which are deducted from your credit line.

There may be a bill pay option if you want to use the funds to pay bills, or an option to transfer funds over the phone.

In any case, it should be pretty easy and convenient (and usually free) to access your money.

Interest Rate on a Home Equity Line of Credit

Reverse mortgage disadvantages

A HELOC s interest rate is determined by the prime rate plus the margin designated by the bank or lender.

Many banks will offer borrowers the prime rate with zero margin, or even less than prime. You ll often see bank ads that say prime -1% or something to that effect. Of course, this is usually an introductory rate, and will often go up after the first few months or year.

After that promo period, expect a margin greater than zero plus prime. For example, you might see something like prime + 2%. Prime is currently 4.25%, so the fully-indexed rate would be 6.25%. A well-qualified borrower may get a rate as low as prime + 0.5%.

If your loan scenario is a bit more high-risk, it could carry a margin of 4% or more, which when combined with the prime rate, can be quite hefty. That would make the interest rate 8.25%, which isn t a very desirable rate.

When shopping for a HELOC, pay close attention to the margin since it s the one number that you can control. The prime rate is the same for everyone.

Tip: Ask for the margin during the draw period and the repayment period. Sometimes lenders will impose a higher margin during the latter period, which can get expensive!

Downsides of Home Equity Lines of Credit

Many borrowers steer clear of HELOCs for a number of reasons. The main reason being that a HELOC is an adjustable-rate mortgage, tied to prime. Whenever the Fed moves the prime rate, the rate on your HELOC will change.

Usually it s only .25% at a time, but the Fed raised the prime rate about 20 times in a row since 2004, pushing the rate from 4% to 8.25%, before it began to move the other way. So your interest rate can fluctuate greatly, even if the Fed moves prime in so-called measured amounts.

HELOCs generally adjust either monthly or quarterly, depending on the terms specified by the lender. Check your paperwork so you know what to expect after the Fed makes a move.

Also note that HELOCs don t have periodic interest rate caps like standard adjustable-rate mortgages, just lifetime caps, so the rate can fluctuate as much as the Fed allows it to, up to 18% in California (it varies by state).

Term of a Home Equity Line of Credit

A HELOC normally has a 25-year term, with a draw period and a repayment period. The draw is typically the first 5 to 10 years, followed by the repayment period of 10 to 20 years.

During the draw period, the homeowner can borrow as much as they d like within the line amount, and can make interest-only payments on the amount drawn upon. There is usually a minimum payment, just like a credit card.

After the draw period , the borrower must pay off the principal of the HELOC, along with the interest. This period is known as the repayment period .

Usually the loan balance is broken down into monthly payments, but there could also be a balloon payment because of the way the loan amortizes. Also note that some HELOCs don t have a repayment period, so full payment is simply due at the end of the draw period.

Home Equity Lines of Credit Often Serve as Second Mortgages

Most HELOCs are opened behind an existing first mortgage as a source of funds to pay down credit cards or other revolving debt, or for home improvements and other household costs. HELOCs provide flexibility at a relatively low interest-rate compared to a standard credit card.

They can also be used as purchase-money second mortgages to extend financing and allow the homeowner to put less money down on a hom purchase.

In this common scenario, the HELOC utilizes the entire credit line as the down payment, and the borrower must pay interest on the full amount from day one.

For example, if a borrower wanted a zero-down mortgage on a $100,000 property, they could open a $80,000 first mortgage at 80 percent loan-to-value and a 20 percent second mortgage (the HELOC) to cover the remaining $20,000.

Some borrowers may even open a HELOC as a first mortgage, although it is less common and can be fairly risky for a homeowner if the prime rate rises rapidly.

Home Equity Line of Credit vs. Home Equity Loan

With a home equity loan, you receive a lump sum and make monthly mortgage payments on the total amount borrowed, usually at a fixed rate.

A HELOC, on the other hand, not only gives the borrower the freedom to decide when and if to use the money, but also how much they need to pay back and when.

Borrowers generally choose HELOCs as purchase-money second mortgages because the interest rate is lower than closed-end fixed second mortgages.

And HELOCs have an interest-only option which many fixed-end seconds don t offer. HELOCs also don t carry prepayment penalties, whereas many fixed-end seconds do.

Once the borrower pays down the HELOC, they also have the option to draw upon it again if they need additional funds, something a home equity loan doesn t offer.

Common HELOC Fees

Another negative to HELOCs are the associated fees. Some of them require you to order an appraisal, which can amount to several hundred dollars. Others will charge closing costs and an origination fee.

There may also be an annual fee on your HELOC, which could range from $50 to $100 or more per year. Over time that can add up.

HELOCs also tend to come with early closure fees of around $300-$500, although they don t usually carry an explicit prepayment penalty.

This means if you close your equity line just 1-3 years into the loan, the bank will charge this fee. Again, they want to make money off the deal, so if you close the line too quickly, they ll probably charge you for it.

Sometimes the fee will be equivalent to what they would have charged for closing costs. For example, they may say you can get a HELOC without closing costs, but charge you those fees later if the line isn t kept open for a minimum period of time.

lower rate than a fixed loan

ability to choose draw amount you want, when you want

able to borrow multiple times from same line


1 Reverse Mortgage Calculator, age, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Reverse Mortgage Calculator

Each week we update our online calculator to reflect our most popular programs offered at All Reverse Mortgage . You can request a formal analysis including written loan comparisons of ALL options, closing costs and amortization schedules by completing step 3 or call us while you’re using this calculator Toll Free (800) 565-1722

Input your date of birth, property zip code, estimated home value and existing mortgages (if applicable)

Unsure of your home value? Not to worry. When you request a formal analysis our team will also include a free property report.

Did You Know? Anytime you close a reverse mortgage within 6 months from your next birthday you will automatically be calculated a year older.

Step 2

Did You Know? On the adjustable plans you can change the terms of your reverse mortgage after closing for a time fee of $20. i.e. Move from a credit line to payment plan or vice versa.

Unsure of Program? Not to worry. Our expert team will provide straightforward comparisons of all your options. We look forward to helping you decide which HECM program may be most suitable for your immediate or long term needs.

Step 3

Did You Know? Once you request an application we lock in your expected rate which guarantees you access to the current principle limit even if rates should rise.

Additional Calculators courtesy of All Reverse

Legal Stuff: All Reverse Mortgage Calculator and all content included on this page and on their website are for borrower convenience only. Results using the online calculator are loan estimates, and terms produced by the calculator may not be presently available credit terms. All Reverse Mortgage will endeavor to maintain current information and a fully functioning calculator for customer use at all times, but cannot guarantee terms available or that system malfunctions will never occur. To receive an actual proposal or available programs, rates and terms, you must contact our office. Interest rates (fixed rate and adjustable rate, LIBOR index) and amortization, mortgage insurance premiums (MIP), origination fees, lender margins, payment options and closing costs may vary. Borrowers with reverse mortgages must continue to pay all property charges such as property taxes, hazard insurance and HOA dues (if any). Please contact our office to determine eligibility


A Reverse Mortgage Price Counselor Counseling Consultant, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Choosing a Consultant for Reverse Mortgage Price Counseling

Counseling for Reverse Mortgages is Advisable or What Your Reverse Mortgage Counselor Should Do For You

As reverse mortgages grow more and become more popular, the major concern of the US government is protecting seniors from the repercussions of a bad decision. This is one reason why the American government requires all reverse mortgage applicants to take credit counseling before their loan can be processed.

Membership-based organizations including the AARP have counselors whose job is to help senior citizens find their way through reverse mortgage loan industry. The good thing is that the counseling is offered free of price to members.

Most people think credit counseling is just a waste of time. However, the fact is that without adequate information, you re bound to make the wrong choices. A wrong choice is the price that senior citizens cannot afford at this stage of their life. It is therefore very important to get counseling from a trained consultant regardless of the price.

So what can you expect from a reverse mortgage counselor?

  • Information. Your reverse mortgage consultant will not overload you with useless information. Rather, he or she will make you understand everything about reverse mortgage loans and how they work.
  • Your individual situation. The consultant will also explore your individual situation. You will be guided which reverse mortgage process is best for your situation.
  • Benefit versus trade-off. Knowing the pros and cons, benefits and disadvantages of a reverse mortgage is not easily understood. This is why you need to talk to a credit counselor. The most important question you can ask your counselors as part of your FAQ: How will this loan affect my finances?
  • Planning for your estate. Not all seniors who take out a reverse mortgage loan are desperate for money. In fact, many of them are wealthy individuals who are planning their estate so can leave something for their heirs. A good credit counselor can give you advice on this.

If you think you re already ready for a reverse mortgage loan, then go right ahead. A reverse mortgage is really just an ordinary mortgage, except that the loan is not paid if the borrower still lives in the house. It can only be paid when the borrower dies or when he or she moves out of the house. You can get your reverse mortgage money in three ways: a lump sum, monthly payouts, or a line of credit.

The good thing about reverse mortgages it is an industry regulated by the Department of Housing. Reverse mortgage lenders also have their own internal controls with the National Reverse Mortgage Lenders Association (NRMLA).

NRMLA is a trade association that holds lenders accountable for their reverse mortgage practices. Representing lenders and investors, the NRMLA does a lot of things, including:

  • Providing education about reverse mortgages,
  • Training reverse mortgage lenders to be more sensitive to the needs of America s seniors,
  • Developing best practices within the industry, and
  • Enforcing a code of conduct among reverse mortgage lenders.

There are many reverse mortgage programs on the market today. But the most popular of these is the HECM program. This program is administered and insured by the Department of Housing and Urban Development.

Seniors who are considering reverse mortgages are advised to consult with their family members so it doesn t surprise them when they start dealing with inheritance. They should also seek one or more professional loan counselors for reverse mortgage counseling, this can all be done at a relatively affordable price.

Reverse mortgage disadvantages


Home Equity Line of Credit – HELOC, The Truth About, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Home Equity Line of Credit

Reverse mortgage disadvantages

A HELOC , or home equity line of credit, is a type of home loan that allows a borrower to open up a line of credit using their home equity as collateral.

It differs from a conventional home loan for several different reasons. The main difference is that a HELOC is simply a line of credit a homeowner can draw from, up to a pre-determined amount set by the mortgage lender, whereas with a typical mortgage, the amount borrowed is the total amount financed.

In other words, a HELOC is a lot like a credit card because of its revolving balance nature. When you open a credit card, the bank sets a certain credit limit, say $10,000. You don t need to pay interest on the total amount, or even withdraw or spend any of the $10,000, but it is available if and when you need it.

That s also how a HELOC works. Your bank or lender will give you a line of credit for a certain amount, say $100,000. And you can draw upon it as much or as little as you d like, up to that $100,000, if and when you want.

Generally, you will be required to make an initial minimum draw, say $10,000 or $25,000, depending on the total line amount. This ensures the bank actually makes money on the transaction, and doesn t just give you a line of credit you never touch.

At that point, you can borrow from it, pay it back, and then borrow again. Or never touch it and just set it aside for a rainy day.

Additionally, most HELOCs allow you to make just the interest-only payment, instead of having to pay back the principal. This keeps payments low while also giving homeowners access to much needed cash.

It s a flexible choice because you get the option to use the line of credit if you need it, without having to pay interest if you don t.

Most people use the funds to pay for things like college tuition, home improvements, higher-interest rate debt, or to fund another home purchase.

Accessing Your Funds with a HELOC

Once your HELOC is open, you ll have a variety of options to access the funds.

Most banks will provide you with an access card that works kind of like an ATM debit/credit card. You can make purchases with it and/or withdraw cash at a branch location.

You may also be given the option to transfer funds to a linked bank account, or be given checks that can be written to anyone for any purpose, which are deducted from your credit line.

There may be a bill pay option if you want to use the funds to pay bills, or an option to transfer funds over the phone.

In any case, it should be pretty easy and convenient (and usually free) to access your money.

Interest Rate on a Home Equity Line of Credit

Reverse mortgage disadvantages

A HELOC s interest rate is determined by the prime rate plus the margin designated by the bank or lender.

Many banks will offer borrowers the prime rate with zero margin, or even less than prime. You ll often see bank ads that say prime -1% or something to that effect. Of course, this is usually an introductory rate, and will often go up after the first few months or year.

After that promo period, expect a margin greater than zero plus prime. For example, you might see something like prime + 2%. Prime is currently 4.25%, so the fully-indexed rate would be 6.25%. A well-qualified borrower may get a rate as low as prime + 0.5%.

If your loan scenario is a bit more high-risk, it could carry a margin of 4% or more, which when combined with the prime rate, can be quite hefty. That would make the interest rate 8.25%, which isn t a very desirable rate.

When shopping for a HELOC, pay close attention to the margin since it s the one number that you can control. The prime rate is the same for everyone.

Tip: Ask for the margin during the draw period and the repayment period. Sometimes lenders will impose a higher margin during the latter period, which can get expensive!

Downsides of Home Equity Lines of Credit

Many borrowers steer clear of HELOCs for a number of reasons. The main reason being that a HELOC is an adjustable-rate mortgage, tied to prime. Whenever the Fed moves the prime rate, the rate on your HELOC will change.

Usually it s only .25% at a time, but the Fed raised the prime rate about 20 times in a row since 2004, pushing the rate from 4% to 8.25%, before it began to move the other way. So your interest rate can fluctuate greatly, even if the Fed moves prime in so-called measured amounts.

HELOCs generally adjust either monthly or quarterly, depending on the terms specified by the lender. Check your paperwork so you know what to expect after the Fed makes a move.

Also note that HELOCs don t have periodic interest rate caps like standard adjustable-rate mortgages, just lifetime caps, so the rate can fluctuate as much as the Fed allows it to, up to 18% in California (it varies by state).

Term of a Home Equity Line of Credit

A HELOC normally has a 25-year term, with a draw period and a repayment period. The draw is typically the first 5 to 10 years, followed by the repayment period of 10 to 20 years.

During the draw period, the homeowner can borrow as much as they d like within the line amount, and can make interest-only payments on the amount drawn upon. There is usually a minimum payment, just like a credit card.

After the draw period , the borrower must pay off the principal of the HELOC, along with the interest. This period is known as the repayment period .

Usually the loan balance is broken down into monthly payments, but there could also be a balloon payment because of the way the loan amortizes. Also note that some HELOCs don t have a repayment period, so full payment is simply due at the end of the draw period.

Home Equity Lines of Credit Often Serve as Second Mortgages

Most HELOCs are opened behind an existing first mortgage as a source of funds to pay down credit cards or other revolving debt, or for home improvements and other household costs. HELOCs provide flexibility at a relatively low interest-rate compared to a standard credit card.

They can also be used as purchase-money second mortgages to extend financing and allow the homeowner to put less money down on a hom purchase.

In this common scenario, the HELOC utilizes the entire credit line as the down payment, and the borrower must pay interest on the full amount from day one.

For example, if a borrower wanted a zero-down mortgage on a $100,000 property, they could open a $80,000 first mortgage at 80 percent loan-to-value and a 20 percent second mortgage (the HELOC) to cover the remaining $20,000.

Some borrowers may even open a HELOC as a first mortgage, although it is less common and can be fairly risky for a homeowner if the prime rate rises rapidly.

Home Equity Line of Credit vs. Home Equity Loan

With a home equity loan, you receive a lump sum and make monthly mortgage payments on the total amount borrowed, usually at a fixed rate.

A HELOC, on the other hand, not only gives the borrower the freedom to decide when and if to use the money, but also how much they need to pay back and when.

Borrowers generally choose HELOCs as purchase-money second mortgages because the interest rate is lower than closed-end fixed second mortgages.

And HELOCs have an interest-only option which many fixed-end seconds don t offer. HELOCs also don t carry prepayment penalties, whereas many fixed-end seconds do.

Once the borrower pays down the HELOC, they also have the option to draw upon it again if they need additional funds, something a home equity loan doesn t offer.

Common HELOC Fees

Another negative to HELOCs are the associated fees. Some of them require you to order an appraisal, which can amount to several hundred dollars. Others will charge closing costs and an origination fee.

There may also be an annual fee on your HELOC, which could range from $50 to $100 or more per year. Over time that can add up.

HELOCs also tend to come with early closure fees of around $300-$500, although they don t usually carry an explicit prepayment penalty.

This means if you close your equity line just 1-3 years into the loan, the bank will charge this fee. Again, they want to make money off the deal, so if you close the line too quickly, they ll probably charge you for it.

Sometimes the fee will be equivalent to what they would have charged for closing costs. For example, they may say you can get a HELOC without closing costs, but charge you those fees later if the line isn t kept open for a minimum period of time.

lower rate than a fixed loan

ability to choose draw amount you want, when you want

able to borrow multiple times from same line


Reverse Mortgage Pros and Cons, Learn the Disadvantages, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Reverse Mortgage Pros and Cons

  • Allows the homeowner to stay in the home. 1
  • Can pay off existing mortgages on the home.
  • No monthly mortgage payments are required, however the homeowner must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
  • The homeowner receivespayments on flexible terms:
    • Credit line for emergencies
    • Monthly payments
    • Lump sum distribution (only on fixed rate loans)
    • Any combination of the above
  • A reverse mortgage can not get upside down so the heirs will never be personally liable for more than the home is sold for.
  • Heirs inherit the home and keep any remaining equity after the balance of the reverse mortgage is paid off.
  • Loan proceeds are not taxed as income or otherwise (though you must continue to pay required property taxes).
  • The interest rate may be lower than traditional mortgages and home equity loans.
  • The fees on a reverse mortgage are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of the insurance cost. The largest costs are:
    • FHA mortgage insurance
    • Origination fee
  • The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
  • A reverse mortgage loan usually does not affect eligibility for entitlement programs, such as Medicare or Social Security benefits. However, some needs based government benefits such as Medicaid and Supplemental Security Income (SSI) may be affected by a reverse mortgage loan. You should consult a qualified professional to determine if there would be any impact to your government benefits.
  • The program is not well understood by most individuals. However, the availability of independent reverse mortgage counseling helps.

Next Step: Take 3 minutes now to calculate your eligibility for a reverse mortgage loan below.


1 Reverse Mortgage Calculator, age, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Reverse Mortgage Calculator

Each week we update our online calculator to reflect our most popular programs offered at All Reverse Mortgage . You can request a formal analysis including written loan comparisons of ALL options, closing costs and amortization schedules by completing step 3 or call us while you’re using this calculator Toll Free (800) 565-1722

Input your date of birth, property zip code, estimated home value and existing mortgages (if applicable)

Unsure of your home value? Not to worry. When you request a formal analysis our team will also include a free property report.

Did You Know? Anytime you close a reverse mortgage within 6 months from your next birthday you will automatically be calculated a year older.

Step 2

Did You Know? On the adjustable plans you can change the terms of your reverse mortgage after closing for a time fee of $20. i.e. Move from a credit line to payment plan or vice versa.

Unsure of Program? Not to worry. Our expert team will provide straightforward comparisons of all your options. We look forward to helping you decide which HECM program may be most suitable for your immediate or long term needs.

Step 3

Did You Know? Once you request an application we lock in your expected rate which guarantees you access to the current principle limit even if rates should rise.

Additional Calculators courtesy of All Reverse

Legal Stuff: All Reverse Mortgage Calculator and all content included on this page and on their website are for borrower convenience only. Results using the online calculator are loan estimates, and terms produced by the calculator may not be presently available credit terms. All Reverse Mortgage will endeavor to maintain current information and a fully functioning calculator for customer use at all times, but cannot guarantee terms available or that system malfunctions will never occur. To receive an actual proposal or available programs, rates and terms, you must contact our office. Interest rates (fixed rate and adjustable rate, LIBOR index) and amortization, mortgage insurance premiums (MIP), origination fees, lender margins, payment options and closing costs may vary. Borrowers with reverse mortgages must continue to pay all property charges such as property taxes, hazard insurance and HOA dues (if any). Please contact our office to determine eligibility


Home Equity Line of Credit – HELOC, The Truth About, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Home Equity Line of Credit

Reverse mortgage disadvantages

A HELOC , or home equity line of credit, is a type of home loan that allows a borrower to open up a line of credit using their home equity as collateral.

It differs from a conventional home loan for several different reasons. The main difference is that a HELOC is simply a line of credit a homeowner can draw from, up to a pre-determined amount set by the mortgage lender, whereas with a typical mortgage, the amount borrowed is the total amount financed.

In other words, a HELOC is a lot like a credit card because of its revolving balance nature. When you open a credit card, the bank sets a certain credit limit, say $10,000. You don t need to pay interest on the total amount, or even withdraw or spend any of the $10,000, but it is available if and when you need it.

That s also how a HELOC works. Your bank or lender will give you a line of credit for a certain amount, say $100,000. And you can draw upon it as much or as little as you d like, up to that $100,000, if and when you want.

Generally, you will be required to make an initial minimum draw, say $10,000 or $25,000, depending on the total line amount. This ensures the bank actually makes money on the transaction, and doesn t just give you a line of credit you never touch.

At that point, you can borrow from it, pay it back, and then borrow again. Or never touch it and just set it aside for a rainy day.

Additionally, most HELOCs allow you to make just the interest-only payment, instead of having to pay back the principal. This keeps payments low while also giving homeowners access to much needed cash.

It s a flexible choice because you get the option to use the line of credit if you need it, without having to pay interest if you don t.

Most people use the funds to pay for things like college tuition, home improvements, higher-interest rate debt, or to fund another home purchase.

Accessing Your Funds with a HELOC

Once your HELOC is open, you ll have a variety of options to access the funds.

Most banks will provide you with an access card that works kind of like an ATM debit/credit card. You can make purchases with it and/or withdraw cash at a branch location.

You may also be given the option to transfer funds to a linked bank account, or be given checks that can be written to anyone for any purpose, which are deducted from your credit line.

There may be a bill pay option if you want to use the funds to pay bills, or an option to transfer funds over the phone.

In any case, it should be pretty easy and convenient (and usually free) to access your money.

Interest Rate on a Home Equity Line of Credit

Reverse mortgage disadvantages

A HELOC s interest rate is determined by the prime rate plus the margin designated by the bank or lender.

Many banks will offer borrowers the prime rate with zero margin, or even less than prime. You ll often see bank ads that say prime -1% or something to that effect. Of course, this is usually an introductory rate, and will often go up after the first few months or year.

After that promo period, expect a margin greater than zero plus prime. For example, you might see something like prime + 2%. Prime is currently 4.25%, so the fully-indexed rate would be 6.25%. A well-qualified borrower may get a rate as low as prime + 0.5%.

If your loan scenario is a bit more high-risk, it could carry a margin of 4% or more, which when combined with the prime rate, can be quite hefty. That would make the interest rate 8.25%, which isn t a very desirable rate.

When shopping for a HELOC, pay close attention to the margin since it s the one number that you can control. The prime rate is the same for everyone.

Tip: Ask for the margin during the draw period and the repayment period. Sometimes lenders will impose a higher margin during the latter period, which can get expensive!

Downsides of Home Equity Lines of Credit

Many borrowers steer clear of HELOCs for a number of reasons. The main reason being that a HELOC is an adjustable-rate mortgage, tied to prime. Whenever the Fed moves the prime rate, the rate on your HELOC will change.

Usually it s only .25% at a time, but the Fed raised the prime rate about 20 times in a row since 2004, pushing the rate from 4% to 8.25%, before it began to move the other way. So your interest rate can fluctuate greatly, even if the Fed moves prime in so-called measured amounts.

HELOCs generally adjust either monthly or quarterly, depending on the terms specified by the lender. Check your paperwork so you know what to expect after the Fed makes a move.

Also note that HELOCs don t have periodic interest rate caps like standard adjustable-rate mortgages, just lifetime caps, so the rate can fluctuate as much as the Fed allows it to, up to 18% in California (it varies by state).

Term of a Home Equity Line of Credit

A HELOC normally has a 25-year term, with a draw period and a repayment period. The draw is typically the first 5 to 10 years, followed by the repayment period of 10 to 20 years.

During the draw period, the homeowner can borrow as much as they d like within the line amount, and can make interest-only payments on the amount drawn upon. There is usually a minimum payment, just like a credit card.

After the draw period , the borrower must pay off the principal of the HELOC, along with the interest. This period is known as the repayment period .

Usually the loan balance is broken down into monthly payments, but there could also be a balloon payment because of the way the loan amortizes. Also note that some HELOCs don t have a repayment period, so full payment is simply due at the end of the draw period.

Home Equity Lines of Credit Often Serve as Second Mortgages

Most HELOCs are opened behind an existing first mortgage as a source of funds to pay down credit cards or other revolving debt, or for home improvements and other household costs. HELOCs provide flexibility at a relatively low interest-rate compared to a standard credit card.

They can also be used as purchase-money second mortgages to extend financing and allow the homeowner to put less money down on a hom purchase.

In this common scenario, the HELOC utilizes the entire credit line as the down payment, and the borrower must pay interest on the full amount from day one.

For example, if a borrower wanted a zero-down mortgage on a $100,000 property, they could open a $80,000 first mortgage at 80 percent loan-to-value and a 20 percent second mortgage (the HELOC) to cover the remaining $20,000.

Some borrowers may even open a HELOC as a first mortgage, although it is less common and can be fairly risky for a homeowner if the prime rate rises rapidly.

Home Equity Line of Credit vs. Home Equity Loan

With a home equity loan, you receive a lump sum and make monthly mortgage payments on the total amount borrowed, usually at a fixed rate.

A HELOC, on the other hand, not only gives the borrower the freedom to decide when and if to use the money, but also how much they need to pay back and when.

Borrowers generally choose HELOCs as purchase-money second mortgages because the interest rate is lower than closed-end fixed second mortgages.

And HELOCs have an interest-only option which many fixed-end seconds don t offer. HELOCs also don t carry prepayment penalties, whereas many fixed-end seconds do.

Once the borrower pays down the HELOC, they also have the option to draw upon it again if they need additional funds, something a home equity loan doesn t offer.

Common HELOC Fees

Another negative to HELOCs are the associated fees. Some of them require you to order an appraisal, which can amount to several hundred dollars. Others will charge closing costs and an origination fee.

There may also be an annual fee on your HELOC, which could range from $50 to $100 or more per year. Over time that can add up.

HELOCs also tend to come with early closure fees of around $300-$500, although they don t usually carry an explicit prepayment penalty.

This means if you close your equity line just 1-3 years into the loan, the bank will charge this fee. Again, they want to make money off the deal, so if you close the line too quickly, they ll probably charge you for it.

Sometimes the fee will be equivalent to what they would have charged for closing costs. For example, they may say you can get a HELOC without closing costs, but charge you those fees later if the line isn t kept open for a minimum period of time.

lower rate than a fixed loan

ability to choose draw amount you want, when you want

able to borrow multiple times from same line


Reverse Mortgage Pros and Cons, Learn the Disadvantages, reverse mortgage disadvantages.#Reverse #mortgage #disadvantages


Reverse Mortgage Pros and Cons

  • Allows the homeowner to stay in the home. 1
  • Can pay off existing mortgages on the home.
  • No monthly mortgage payments are required, however the homeowner must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
  • The homeowner receivespayments on flexible terms:
    • Credit line for emergencies
    • Monthly payments
    • Lump sum distribution (only on fixed rate loans)
    • Any combination of the above
  • A reverse mortgage can not get upside down so the heirs will never be personally liable for more than the home is sold for.
  • Heirs inherit the home and keep any remaining equity after the balance of the reverse mortgage is paid off.
  • Loan proceeds are not taxed as income or otherwise (though you must continue to pay required property taxes).
  • The interest rate may be lower than traditional mortgages and home equity loans.
  • The fees on a reverse mortgage are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of the insurance cost. The largest costs are:
    • FHA mortgage insurance
    • Origination fee
  • The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
  • A reverse mortgage loan usually does not affect eligibility for entitlement programs, such as Medicare or Social Security benefits. However, some needs based government benefits such as Medicaid and Supplemental Security Income (SSI) may be affected by a reverse mortgage loan. You should consult a qualified professional to determine if there would be any impact to your government benefits.
  • The program is not well understood by most individuals. However, the availability of independent reverse mortgage counseling helps.

Next Step: Take 3 minutes now to calculate your eligibility for a reverse mortgage loan below.


Pros, cons, benefits, disadvantages and pitfalls of reverse mortgages #amortization #table


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Pros and Cons, Benefits, Pitfalls and Disadvantages of Reverse Mortgages

People who are marketing reverse mortgages are really good at what they do. Just look at reverse mortgages now they are the hot trend in loans and getting some cash into the coffers of America s seniors .

While you may believe all the hype, common sense will tell you that just like all good things they have their pros and cons, advantages and disadvantages, benefits and pitfalls.

PROS, ADVANTAGES, BENEFITS

A reverse mortgage is another way that you can get some money from your own home. In the past, you had to sell your house or use it as collateral for a loan which had to be repaid in monthly installments.

Reversed mortgages. on the other hand, is a type of mortgage where the loan amount is not repaid as long as the homeowner is still living inside the house. The loan is only repaid when the borrowers dies or permanently moves out of the house, or if the house is sold. The lender pays out the loan in three ways: lump sum, monthly payouts, or line of credit. This in reality is a great pro and benefit for the elderly.

There are actually three types of reverse mortgages: (the least expensive) single purpose reverse mortgage, HECM or Home Equity Conversion Mortgages. and private proprietary reverse mortgages. The most popular programs are the HECM loans that are backed by HUD with FHA mortgage insurance.

Single purpose loans are the cheapest, but you can only use them for only one purpose, that can be either home repair or for paying off property taxes. If you seek low-cost mortgages that you can use for different purposes, HECMs are some of the least expensive ones you can find, partly because the american government insures them. Low prices on HECM programs can be added to the list of pros and benefits.

Reverse mortgages are a lot like wine: the older, you are the better. The older you are, the more money you can get. Seniors must be at least 62 years old and must own their home. Eligible homes in this case include single detached homes as well as HUD-approved condominiums and dwellings. Trailer homes do not qualify.

CONS, DISADVANTAGES, PITFALLS

If you re taking out an HECM reverse mortgage, you re required to talk to a counselor designated by the federal government. You will find out soon enough that if you aren t careful, reverse mortgages can negatively impact your finances. Your credit consultant should be sure to point out to you all the cons, disadvantages and pitfalls of reverse mortgage loans aloung with all the costs and fees. Having to talk to a credit adviser can seem like a great disadvantage but in the end it will serve as benefit and can be considered a check on your list of pros.

The federal government has quoted these disadvantages and pitfalls of reverse mortgages:
They can affect your eligibility for another type of loan.
This may affect the inheritance of the borrower s heirs.
The borrower could lose his or her eligibility for Medicaid and Supplementary Security Income (SSI).

What most people do not know is that Medicaid and SSI considers loan advances as cash assets or liquid assets when they are kept beyond the month that a recipient receives them. Borrowers may just find themselves ineligible for these State benefit programs.

There are many reasons why despite the above cons, disadvantages and pitfalls a senior citizen would still take out a reverse mortgage loan. The most common reason is to enable the borrower to pay for the cost of living or to maintain a lifestyle. Still, there are others who use reverse mortgages to plan their estate for the benefit of their heirs.


Reverse Mortgage Disadvantages #home #mortgage #rates


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A reverse mortgage may be an excellent way for you to benefit from the equity in your home. It is another solution to get money for retirement. However, there are several reverse mortgage disadvantages that you should be aware. You should research every option available before making the decision to get a reverse mortgage.

A reverse mortgage is similar to a regular loan except, instead of you paying back a loan, you are paid the money from the loan based on the equity in your home. The value of your home and how old you are will determine how much money you can get. The older you are, the more money you can obtain from a reverse mortgage.

How Does Reverse Mortgage Work?

In order to get a reverse mortgage, you must be age 62 or over, own your own home, and prove that your home is your principal residence. The lender would then lend money to you based on the equity in your home. You can get money from your reverse mortgage paid to you monthly, in a lump sum, or from a line of credit you can draw from whenever you please. You or your co-signing spouse cannot be forced from the home as long as you both live unless you move from or sell your home.

Reverse loan payments are not taxable. If you must go to a nursing home, the loan does not have to be paid until after 12 consecutive months.

Most states will require that you get reverse mortgage counseling before applying for a reverse mortgage loan. This counseling will ensure that you know every pro and con of getting a reverse mortgage loan. The cost for this counseling is payable by you and will vary from agency to agency.

Reverse Mortgage Disadvantages

Reverse mortgages also have disadvantages. If you die, the loan balance will come due immediately. The house is sold but, if the loan exceeds the value of the home, the balance is due from your estate. The same is true if you sell your home or move out. You must pay the outstanding balance of the loan whether or not the property value of your home has dropped.

If you get a reverse mortgage, you will need to be aware that you will be required to make home improvements, pay property taxes, make repairs on the property, and keep insurance because you will retain the title while the loan is in effect. These costs can be taken from the reverse mortgage funds.

There are closing costs, mortgage insurance premiums, and closing costs associated with a reverse mortgage. There may be servicing fees during the life of the mortgage loan. This varies from lender to lender. Variable rates of interest, rather than fixed rates, are usual for this type of loan. This means that the interest amount will change as the market changes. Interest is added each month to the amount owed at the end of the loan.

Although a reverse mortgage does not affect Social Security or Medicare benefits, it will severely impact Medicaid and food stamp benefits. The government will take all income into consideration for these latter benefits, so a reverse mortgage’s funds will probably keep you from getting them.

When you die, instead of leaving your home to your children, your home will be sold and the loan, fees, and interest would be paid. If there is anything left over after that, your estate would receive it. The interest on reverse mortgages is not deductible until the loan is paid in part or in full.

Because the housing market has fallen so much over the last few years, you must consider whether a reverse mortgage solutions would give you the money you would expect. Better options may be to move to a smaller house or wait for the market to go back up.

Reverse Mortgage FAQ

What’s a reverse mortgage? Who can get one? How is it different from a traditional mortgage? How does reverse mortgage work? These are just a few of the many questions people have about this increasingly-popular option.

What’s a reverse mortgage?

A reverse mortgage gives you cash based on the equity in your home. The older you are and the more equity you have, the more money you can borrow.

How old do I have to be to qualify?

Generally, you must be 62 years of age or older.

How much are monthly payments?

Unless you take out an uninsured mortgage, there are no monthly payments. The money that your lender gives is yours to keep until you sell your home, move out or die. You’re payment-free until one of these things happens.

If you receive an uninsured reverse mortgage, you select a fixed term when you sign the paperwork and receive your money. When this term is up, you begin repaying – with all interest and any other charges.

Do I pay interest?

Yes. It accrues until one of the three things that we just discussed happens. Sometimes the APR (Annual Percentage Rate) of interest is fixed, but sometimes it can fluctuate. You’ll know what to expect before you sign the paperwork, though.

What can I do with the money?

Almost anything you want. People who have taken these mortgages use them to travel, pay medical bills, maintain their quality of life, repair or remodel their homes and many other things. Your lender can tell you more.

Do I have to own the home?

Can I lose my home?

No. It’s yours to live in until you sell, move out or die. Unlike regular mortgages, you aren’t risking foreclosure if you miss a few monthly payments.

Do I keep the title to my home?

Yes. This means that you can’t lose your home, but also that you’re still responsible for paying taxes and other related expenses.

You can receive a lump sum, regular payments, or a line of credit. Or, you can receive a combination of these three. Check with your lender to see what options are available to you, and be sure to ask about any fees associated with your preference. Opening a line of credit, for example, might cost you money.

Will this affect my Social Security/Medicare benefits?

No. Another good thing is that this money is non-taxable.

Do I have to pay the associated fees up front?

Typically, your lender can give you the option of financing the fees instead of paying them immediately. Be prepared to pay interest on these fees if this is the case.

Are there different types of reverse mortgages solutions?

There are three types.

Uninsured – the main difference being the fixed term that we’ve already discussed. Be prepared to begin repaying at the end of the term.

Lender-insured – a private lender backs the loan.

FHA-insured – the option that you’ll use if you go through the Department of Housing and Urban Development (HUD) for your reverse mortgage.

Tip: your heirs will probably like this option best. If you die and leave the house to them without first paying off the reverse mortgage, they have up to a year to sell. If they can’t cover the debt, the FHA gives the lender the difference.

Okay, what’s the catch?

The biggest catch to a reverse mortgage is that, because you don’t make regular payments, the interest is tacked on to the principal every month. You’ll end up with compounded interest, which can be high.

Where do I sign up?

Before you start filling out mortgage paperwork, talk to the American Association of Retired Persons for more information. You should also consult your financial planner or advisor, or even a tax attorney, to get a better understanding of the reverse mortgage. These people can also help you figure out which plan, if any, is right for you.

You should also consider options other than a reverse mortgage before you start filling out the paperwork. You could find some other idea that works even better for your needs, so investigate and be aware of reverse mortgage disadvantages before you make a commitment.

For more information, you can visit these Web sites:

The Federal Trade Commission at ftc.gov