Reverse Mortgage Information

Contemporary loan products may have similarities or common features amongst them. However, it is the unique features and the strengths, which determine a loan or a credit program’s ultimate success. Second Mortgage loans (also known as Home Equity loans in general) and Reverse Mortgage Loans (Home Equity Conversion Mortgage or HECM loans) are two such loan products offered by major lenders all over the country. They have more differences than similarities. Let’s take a look at some of these similarities and differences. The similarities and differences include:

• Both second mortgage loans and reverse mortgage loans have one thing in common, the home equity. They both take your home’s equity into consideration in calculating how much loan you are eligible for.
• Second mortgage can be of two major types: a traditional second mortgage and the Home Equity Line of Credit or HELOC. The difference is based on the payment options. A traditional second mortgage is a one-time disbursement of loan based on the appraisal of your home’s value, remaining mortgage debts etc. HELOC, on the other hand, is much like a credit card. It allows you to draw a predetermined amount of money with an affixed interest rate based on the same criteria.
• Reverse mortgage or HECM, is also categorized into several types based on the method of payment. You can choose to have immediate cash advance in one time lump sum amount or you can also opt for a line of credit or cash withdrawal. You can also choose to draw the loan on a monthly basis for specific number of years or for as long as you live in your home.
• A second mortgage or HELOC requires you to have a permissible income-to-debt ratio or in other words a steady and handsome income with respect to your expenses. Reverse mortgage doesn’t need this. You can be approved for a reverse mortgage irrespective of your income as long as your home’s equity is sufficient.
• Approval of second mortgage is not dependent on client’s age while reverse mortgage is only approved for senior homeowners who are 62 and above.
• A second mortgage needs you to make monthly payments and thus it reduces your debts and increases the home’s equity. In reverse mortgage, you have no repayment obligation; rather you are paid by the lender. Your equity reduces as the debts increase.
• Second mortgage loans take your home’s appraised value, outstanding debts, interest rates etc. in consideration to decide how much you will be sanctioned. Reverse mortgage considers your home’s equity, your age, FHA loan limits etc. in determining the loan amount.
• In a second mortgage, failure to make monthly payments may result in foreclosure and ultimately eviction from your home. In case of federally insured reverse mortgage, the scenario is different. Reverse mortgage is based on the assurance that you will stay in your home till you die, move out or sell the home later. There is no involvement of monthly payment to the lender, hence no chances of eviction on the grounds of ‘failure to make monthly payments’.