Many seniors are in a situation where they do not have a lot of income or savings to pay for long-term care, but do have financial resources tied up in their home ownership. HELOCs offer a way for seniors to quickly get cash from the value of their home to pay for long-term care or to make home modifications to enable them to continue living independently in their home.
HELOC vs. Reverse Mortgage
HELOCs are often considered as an alternative to reverse mortgages as an option to pay for care. Reverse mortgages are loans for seniors over 62 years of age that allow eligible applicants to receive cash using equity they have in their homes. This type of loan has considerable consumer protections built-in for the elderly, but there are situations where a HELOC is the better option.
For short term loans of less than five years, HELOCs are more simple with lower associated costs and faster turnaround times. Reverse mortgages have higher closing costs, while costs with a HELOC are low upfront and accumulate over the life of the loan.
As assurance against unforeseen emergencies. While reverse mortgages can be taken as a line of credit, HELOCs are significantly less expensive to do so.
If the future is uncertain and the senior has possible large life changes within a few years, HELOCs can offer greater flexibility than a reverse mortgage.
With mixed age couples; to prevent a reverse mortgage from coming due when one spouse passes away, couples will include both partners as borrowers. This means that both borrowers must be older than 62. Married couples that have large age differences might be in a situation where one spouse is old enough and the other is not.
A HELOC may provide a short-term solution until the younger of the spouses reaches the age of 62.
The amount of money a senior can borrow in a reverse mortgage is calculated on many factors, including the age of the youngest borrower. For borrowers near the minimum age of 62 or for couples with large age differences, the amount that can be borrowed may be too low due to the younger age of one spouse. Therefore HELOCs may provide additional borrowing power to a couple.
For some tax reasons with a HELOC, monthly interest payments are tax deductible in the year they are paid. With a reverse mortgage, interest is not paid until the house is sold or the owner passes away. For some seniors, usually those with higher incomes, it may be better financially to have the loan’s interest payments deducted annually.
Every senior’s situation is different and in some cases a HELOC is not the best option. Here we explore five common health scenarios and why seniors might want or not want to use a HELOC instead of a reverse mortgage.
- Single Seniors in Good Health
For these individuals, a HELOC is beneficial only if they need resources immediately and for just a few years. However, since the senior is in fair health, it is unlikely there is an immediate need. These individuals are probably better served with a reverse mortgage.
- Single Seniors in Need of Care
There is no requirement that seniors remain living in the home as there is with reverse mortgages. Therefore, if a senior needs care that requires them to live outside their home, a HELOC may be a good option. This is especially true since HELOCs are more economical for short-term borrowing. Often moving into senior housing comes as a sudden decision and requires a large upfront, move-in cost. HELOCs can cover these costs while the home is sold.
- Married Seniors in Good Health
Unless there are large age differences in the couple, married seniors in fair health are probably served better with a reverse mortgage. Being in fair health means they probably don’t require the resources immediately. Additionally, mixed age couples often cannot receive a high enough loan amount to make a reverse mortgage feasible or just don’t qualify since amounts are based on the age of the youngest borrower.
- Married Seniors with One Spouse in Need of Care
In this situation both options are available to the couple. There is no clear advantage to one type of loan based on the health status alone. Decisions should be made based on the immediacy and the extent of the family’s need.
- Married Seniors with Both Spouses in Need of Care
With both spouses in immediate or near-term need of care that requires them to live outside the home, the reverse mortgage option is very unlikely. A HELOC is the better short-term option while the family sells the home and then pays for the care with those proceeds.
Financial Requirements - Lenders will consider a senior’s income level and debt to income ratio to determine if they are able to make the monthly payments. This can be an obstacle for seniors on fixed or with limited income. However, lenders also realize that elderly individuals can borrow from the loan balance to make the payment and the loans can be structured as interest-only so the monthly payments are very low. An individual’s credit score is also taken into account.
Home Requirements - Lenders consider the applicant's equity in their home and the existence and amount of other mortgages. In general, most lenders will want applicants to have a loan to value ratio of 80%, at a minimum. This means that homeowners have paid off and own 20% of their home. Note that having another mortgage does not automatically disqualify one for a home equity line of credit.
Personal Factors Not Affecting Eligibility - Neither age, marital or veteran discharge status nor geographic location directly affect eligibility.