Home Equity Options: When Should You Choose a Reverse Mortgage Over a Traditional Mortgage or HELOC?

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    HELOC

    If you don’t qualify for a traditional mortgage, you may still have access to the cash in your home through a HELOC. This is a line of credit backed by your home’s equity. Homeowners must hold at least 20% of the equity to be eligible and can typically borrow up to 65% of the home’s market value.

    As with traditional mortgages, lenders will check your income, debt, and creditworthiness, and may also use the stress test to determine creditworthiness. The interest rates on HELOCs tend to be higher than traditional mortgages, but lower than unsecured credit lines.

    The main benefit of a HELOC is that you can borrow money when needed (up to a set amount that you negotiate with your lender) and pay monthly interest only on the amount you borrowed. There is no payment plan for the financier – you pay off the loan when it is convenient for you – but you must make your interest payments on time or you risk losing your home.

    Similar to a traditional mortgage, a HELOC is best for homeowners who have enough disposable income to make the regular interest payments and repay the principal on their own schedule.

    Reverse mortgage

    Canadians aged 55 or over and living in urban centers in British Columbia, Alberta, Ontario, and Quebec may be able to obtain a reverse mortgage on their primary residence. While there are no income requirements to qualify for a reverse mortgage, the property’s market value must be above a certain threshold. ((Fair bankFor example, one of the two financial institutions that offer reverse mortgages in Canada requires that a home be valued at $ 250,000 or more in order to qualify.)

    A reverse mortgage gives you either a lump sum or regular cash payments of up to 55% of the market value of your home and charges monthly interest on the amount borrowed.

    However, unlike a traditional mortgage or HELOC, you don’t have to make any payments – interest or principal – until the mortgage is due (see table above). That is, provided you meet the mortgage obligations (such as maintaining adequate insurance coverage and other details set out in the contract), there is no risk of losing your home and the lender guarantees that you will never owe more than the property is worth.

    Since there are no payments required as long as you live at home, reverse mortgages may be a good option for those with limited cash flow who plan to stay in the house until they die. It is important to note that the loan amount and interest accrued may need to be paid – either from the proceeds of the home sale or from the estate – so there may not be much equity in the home to pass on to your heirs.

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