A HELOC (Home Equity Line of Credit) is typically cheaper than a reverse mortgage because of the following reasons:
1. Interest Rates:
HELOCs generally have lower interest rates compared to reverse mortgages. While a HELOC rate is usually tied to the prime rate plus a small margin, reverse mortgages often have significantly higher rates due to the unique risks they pose to lenders.
2. Cost Structure:
• HELOC: With a HELOC, you only pay interest on the amount you withdraw, and the interest is simple (not compounded). There are usually minimal upfront costs, such as legal or appraisal fees, but these are generally lower compared to reverse mortgages.
• Reverse Mortgage: Reverse mortgages have higher upfront fees, including origination fees, legal costs, and insurance premiums. These costs are often rolled into the loan, which compounds over time, increasing the total cost.
3. Repayment Terms:
HELOCs require monthly payments (usually interest-only during the draw period), which helps control the balance. Reverse mortgages, on the other hand, require no monthly payments, but the interest compounds, causing the debt to grow significantly over time.
4. Flexibility:
HELOCs provide flexibility to draw funds as needed and repay early without penalties, which can reduce borrowing costs. With reverse mortgages, the entire loan amount is disbursed upfront or structured in payments, but repayment isn’t required until the homeowner moves out, sells the home, or passes away, leading to higher long-term costs.
If you have the financial means to make monthly payments and manage a HELOC responsibly, it is often a more affordable way to access your home equity compared to a reverse mortgage.
