Reverse Mortgage vs. HELOC
Given our aging demographic, it is becoming increasingly common for seniors to outlive their income. A not uncommon scenario is one in which a senior wishes to continue to live at home, has insufficient income to support herself, yet has significant equity in her home. What options are available?
A recent article posted online in the Globe and Mail considered the availability of two different options: (i) a Reverse Mortgage and (ii) a Home Equity Line of Credit ("HELOC"). Both offer a way to borrow money and defer repayment to some degree until the home is sold.
With a HELOC you can borrow up to 80 per cent of the equity in the home at the lowest cost possible. HELOCs are typically priced at prime, which is currently 3 per cent, plus an additional 0.5 to 1 percentage points.
The HELOC is usually the preferable choice because of the way that interest is charged with both borrowing options. With a reverse mortgage, you are not required to repay the debt until the home is sold; however interest is applied not only to the principal, but also to the unpaid interest - which will continuously accumulate over time.
A HELOC, on the other hand, requires monthly payments of at least the interest owed on the loan. For example, if you borrow $100,000 on a HELOC at 3.5 per cent interest every month, you will be required to pay about $300 each month in interest. Repayment of the principal is optional. Of course, in order to make the monthly payments, you will need to have a separate stream of income – if you use the line of credit to pay the interest, then you are still paying interest on interest, and in the same position as you would be if you had a reverse mortgage.
Moira Visoiu
