Reverse Mortgage Or Home Equity Loan, Whats The Difference

When the US government allowed the launch of the reverse mortgage loans years back

, the target was to give seniors a chance to add their disposable cash money by releasing money from the home equity. So it covered the same purpose, than the social security. The target group were seniors, who were at least 62 and owned their permanent home, where they had equity left.

1. The Home Equity Loan Requires Monthly Back Payments.

Also the home equity loan releases the cash from the home equity and the interest rate is usually lower, than with the non secured loan. The difference between the reverse mortgage and home equity loan is, that with the latter you have to make the monthly payments.

If a senior does not have money for the monthly payments, the home equity loan is out of question. But the reverse mortgage loan fills the needs perfectly. There are simply no back payments with the reverse loan, because the capital, all accumulated interests and the costs will be paid back, when the home will be sold, a senior will move away permanently or will pass away.

2. A Senior Cannot Lose More Than The Value Of The Home.

When the senior signs the reverse mortgage loan contract, he has to take the obligatory mortgage insurance. This insurance covers the difference, if the home selling price cannot cover the total sum of the costs. So there is no risk for the lender nor for the borrower.

3. The Credit Score.

With the home equity loan the lender will ask the income statement and the credit score, which have an influence on the terms. The home equity is only a guarantee, if the borrower fails to pay back the agreed payments.

With the reverse mortgage loan the lender is not interested about the incomes or the credit score of the borrower, because all back payments come from the home selling price. And if it fails to cover the sum, the rest comes from the obligatory mortgage insurance. So it is riskless for the lender and for the borrower.

4. The Differences In The Qualifying.

When a senior is at least 62 and owns his or her permanent home, where he has equity left, he will automatically qualify. Okay, there are some mobile home types, which are not accepted. Altogether three seniors can become borrowers, but all must meet the qualification requirements. A senior must pay back the home equity loan every month and this means that the lender will guarantee, that he or she has enough incomes to do that.

5. Which One To Take?

If a senior is under 62 years old, needs a small sum of money for the short time and is able to pay the monthly payments, then the home equity may be more reasonable. But the key difference, the monthly back payments will determine the choice. Because the reverse mortgage is meant to the seniors, who are cash poor and equity rich, the reverse loan is the only source of extra disposable cash money.

by: Juhani Tontti

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