Borrow Money from HECM or HELOC?
This is not an easy question to answer because it depends entirely upon the details and circumstances of the potential borrower and what they are trying to achieve.
Whenever anyone is looking to borrow equity from their home they could possibly do a refinance of their existing mortgage and then request cash back at the close of escrow.
Ideally they would be reducing their interest rate on the mortgage they are refinancing and then receiving the extra funds they requested and are happy with their decision.
They will have a mortgage payment to make each month and it might be larger than what they had been previously paying, because they have taken out cash from their equity and increased their loan amount, even if they reduced the interest rate.
The applicant will have to go through a lengthy Underwriting process, have excellent credit, job stability, cash reserves and enough income to meet the “debt to income” ratios and of course good FICO scores.
This can be a very stressful process as it is more difficult to qualify for traditional mortgages than it was in the past and a great deal of documentation must be “willingly” provided by the applicant to complete the loan process.
And of course, they will have points and fees included in their loan amount as well and depending upon the size of the loan and the interest rate they choose, those fees will vary.
But what if their current loan already has a low interest rate and they want to keep it?
They could consider a Second Trust Deed that would be at a Fixed rate, a Home-Equity-Line-of-Credit or if they are aged 62 or more, a reverse loan/HECM/Home Equity Conversion Mortgage.
Unlike a HELOC, an FHA HECM reverse mortgage will not record in a second position and any existing mortgages on the property will have to be repaid from the funds from the reverse loan.
I will discuss these last two options in my next post.
Boston College Ebook on Reverse Loans
In the next section of the article an example is given how downsizing actually frees up income for other uses by living in a smaller home and reducing the overall housing expenses.
It also mentions the various payments options, at which any time the borrower can change as they wish. There are not prepayment penalties on a Reverse loan, so if for any reason the borrower wishes to put money back into the loan, they can and it will increase their line of credit.
Here is the next section of the article that summarizes the discussion in regards to the Boston College ebook. I will share the last part in a follow up post.
Boston College eBook Touts Retirement Benefits of Getting a Reverse Mortgage
Posted By Jason Oliva On September 16, 2014 @ 6:02 pm In HECM,News,Retirement,Reverse Mortgage
“For example, downsizing from a $250,000 house to a $150,000 property can increase a person’s yearly income by $3,000 after calculating the difference in prices, moving and selling costs and how they affect yearly income. Additionally, this downsizing scenario can also free up $3,250 in yearly income when factoring the new housing expenses (taxes, insurance, upkeep and utility bills) associated with the less expensive home.
But for those who don’t want to task themselves with relocating, that’s where a reverse mortgage can be beneficial, the ebook notes, detailing several key requirements to be eligible for the loan along with critical Home Equity Conversion Mortgage (HECM) guidelines.”
HECM Saver Reverse Loan
In the course of the nine years I have been a Reverse Loan Consultant, there have been many changes in the HUD program from simply one loan to several different options. In the last couple of years, we have seen a Fixed rate become available as well as a reduction in the costs of the loan to the borrower.
The new “Saver” program cuts the costs considerably and gives the senior an option of either a Fixed rate or a Line of Credit. And there is also an opportunity to use funds from a Reverse mortgage to purchase a home without having to qualify on income or credit.
Here’s a recent update on the volume of business in the Reverse loan industry:
“Reverse mortgage applications increased to 8,149 units during February, up 10.2% from the previous month according to data from the Federal Housing Administration.
While application volumes may not be as high as some would like, it’s up 22.7% from the same period last year.
During February, the seasonally adjusted annual rate for total applications rose 15.6% to an estimated 1,676,800. The actual count of applications was 114,215—9.8% over January which was seriously affected by very bad weather, said the agency. Of the total number of applications, 67,990 were purchase transactions; 38,076 were refinances; and 8,149 were for reverse mortgages.
In February, lenders endorsed 6,904 HECM units with a total max claim amount of $6.904 billion, up 6.8% from January. Of all the endorsements, 6,092 were traditional reverse mortgages, and 117 were for the HECM for purchase. HECM Saver volume continued to increase, reaching 296 units during the month, an increase of 79.4%.
Overall, FHA endorsed 88,269 mortgages with a maximum claim amount of $16.8 billion in February. This included 46,899 purchase money mortgages and 34,466 refinanced transactions.
For the purchase loans, three out of every four mortgages were for first-time home buyers, according to FHA.
With respect to the refinanced mortgage transactions, 16,459 were prior FHA cases and 18,009 were conventional mortgages converting to FHA.”
Reverse Mortgage Daily