HELOC vs Reverse Mortgage
 

HELOC vs REVERSE MORTGAGE

The Case For HELOC First and RM Later (only if necessary):

Reverse Home valued at $300K, no mortgage, no other debt
Example#1: No draw and payoff RM in 5 years
All fees to close including PMI = $12K
Available funds $150K - $12K = $138K (but no draw)
Appreciation of home or increase in available funds moot
Leave home due to extended nursing care, etc. in 5 years and
payoff Is the original $12K in fees
To say that the RM fees were covered by available loan
amount in 2+ years is meaningless as the borrower
left the home after 5 years
Result: Borrower paid $12K and received no value. If home
valued at $500K then add $4K as PMI is 2%. Now the
payoff is $16K

HELOC: Fees at or near ZERO. Borrower paid nothing.

Winner: HELOC


Reverse. Same as above but immediate $50K draw and payoff in 5
Example#2: years
Available remaining draw $88K ($138K - $50K draw)
No further draws so increased value of home and available
funds moot
$50K with interest at 3.5% for 5 years = $9K in Interest
Nursing home, etc as above in 5 years and payoff of RM is
$71K ($50K draw + $12K fees + 9K Interest)
5 year cost to borrow $50K is $21K ($12K fees +$9K interest)
If you borrowed $50K from a bank and paid it off in 5 years,
APR would be 8.4%!!! (50K x .084 X 5 years = $21K). Who
would pay 8.4% in this rate environment?

HELOC: Current rate (BofA) 2.5%
No fees
$50K draw, interest after 5 years = $6.5K
Payoff after 5 years = $56.5K or a savings of $14.5K over RM
Will only require monthly payments of $104/mo (interest only)

Winner: HELOC
*** Unless monthly payment of $104 (interest only) is too high for borrower*** When principle of HELOC comes due in 10 years, simply get another HELOC. Remember, you may not even be in the home for 10 more years. If, over time, borrower needs more cash or unable to qualify for another HELOC, then can downsize, sell to heirs and rent back or secure a RM. Borrower will be older and home value likely higher (win/win).

Does it not make more financial sense to begin with a HELOC and then switch to a reverse mortgage ONLY if you begin to experience severe financial distress? Imagine how much more RM money you would qualify for by waiting years as your home will have appreciated AND you are older when you apply. You will be far more ahead than just what the RM available loan amount has increased. Is it not possible that you may never encounter “what if” situations and would have then saved the high cost of a RM altogether? Or, if you do, the “what ifs ” may be small enough that the homeowner may be able to pay it off over a short period of time with a HELOC. So, who cares if it takes 60 to 90 days to secure a RM? You have the HELOC to tide you over for that short period of time. Why sign up for a very expensive product you may never need for “what if” issues that may never materialize?
There are several highly esteemed financial scholars whom I hold in high regard that have suggested a RM, but ONLY after consulting a fiduciary financial planner, to protect against negative sequence of return risks (SRR) early in retirement. They make an excellent point. However, a potential RM borrower may not experience so severe of a negative SRR that it could not be addressed with a HELOC and then payed back at much lower rates. Or, if SRR is particularly onerous, then consider a reverse mortgage.
It appears that a RM is still best utilized as a loan of last resort as they were originally intended such that the borrower does not exit the loan early and incur exorbitantly high costs and interest but instead stays in the home the remainder of their life.

And the taxpayers have not picked up a $13,000,000,000 plus tab on HELOCs as they have on reverse mortgages.

I would like to know where you would get a heloc with no income? As a retiree, with a fixed, small, income, at what bank should i apply?

You are correct. That is addressed in the post. A RM may be appropriate under certain circumstances. Perhaps downsizing would solve a cash flow issue? There are other options. A fiduciary financial planner will help to determine the best path going forward.
Now, RM’s are being marketed to people with substantial assets for “what if” situations which may never occur.

Don't touch your portfolio; use cash reserves and/or a HELOC when the market takes a dip. If you get a reverse mortgage your debt increases every year as interest continues to compound on the original debt and plethora of fees, any additional funds taken out, even on the $35/month fee you must pay just to service the loan (lol) and on the interest already accrued. It is a losing deal to take on debt to pay current expenses and foolish unless you are the rare unicorn who has no heirs or devisees to whom you wish to pass a meaningful inheritance.

Interesting that cousin Brucie will never comment on these threads to tell people they do not know what they are talking about.

Talk about beating a dead horse....

On his threads he just follows the same old sales script, again and again, like a broken record. His allegations that he is posting to educate rather than sell border on the egregious. He dodges responding to well supported documented hard facts which demonstrate the ultimate costs to homeowners and taxpayers of years of compounding relatively high interest rates on ever-growing debt.

But in his defense he does offer to buy people a beer. It just might be the worlds most expensive bottle.

:1rotfl::1rotfl::1rotfl: