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Reverse Mortgage vs. HELOC vs. Unsecured Loan
Whether you’re planning to downsize, upgrade, or simply fund your retirement so you can live comfortably, qualifying for a loan or mortgage as a senior can be difficult on a fixed income. Fortunately, some options are available for retired people living on Social Security or pension income. Depending on your situation, one loan will be a better option than others.
In this article, we compare the reverse mortgage to the HELOC and unsecured loan options side-by-side and then explain how to decide which is the best option for you.
| Reverse Mortgage | HELOC | Unsecured Loan | |
|---|---|---|---|
| Loan Type | Long term | Short term | Short term |
| Loan Amount Allowed | Up to 55% of the value of the property | Up to 65% of property value | Subject to income and credit score |
| Requirement |
-Over 55 -Canadian -Owner Occupied home -Value over $200,000 |
-Over 18 -Must have income -Must have more than 20% equity in the property -Mortgage plus HELOC Cannot be more than 80% of property value |
-Over 18 -Must have income -Subject to approval criteria |
| Qualification in Retirement |
EASY -Appraisal -Credit is not always required |
Moderate -Must meet the credit score requirement -Must meet income requirements |
Difficult -Must meet minimum credit score -Must meet income requirements |
| Security |
Secured against the equity in the home -Borrower still owns the home -No risk of losing home |
Secured against the home -Lender owns the home -Risk of losing home if conditions are not met |
Unsecured -Risk of repossession if conditions are not met |
| Payment | No payments are required until both people on title leave the property | Monthly Interest Payments required | Fixed minimum payments required monthly - principal and interest |
| Average APR | 6% | 5% | 10-28% |
| Minimum advance | $20,000 | Lender dependant | No |
| Fund Type | -Lump Sum -Regular installments -Combination |
-Lump sum -Lump sum and subsequent advances |
-Lump sum |
| Use of Funds | -As you wish -Can gift to children |
-As you wish -Cannot gift to children |
-May have exemptions -Cannot gift to children |
| Upfront Costs |
-Yes -Appraisal fee, administration fee, legal fee. -$1500-2500 |
-Yes -Appraisal fee, administration fee, legal fee. -$1000-2500 |
-Yes -Origination fee ranging between 1-6% of loan amount |
| Conditions |
-Property taxes paid -Insurance in good standing -Property condition maintained |
-Property taxes paid -Insurance in good standing -Property condition maintained -Interest payments met on time and in full |
-Payments are met on time and in full |
| Renewal | -No renewal fees |
-No renewal fees -Open as long as the borrower needs |
-Funds must be repaid at maturity -Renewal not guaranteed -Renewal dependent on income and credit and payments |
| Cancellation | -No risk of recall if it meets conditions | -Yes, if conditions are not met | -Yes, if conditions are not met |
| Tax Benefits | -Tax-free -Can deduct interest payments from tax returns if funds are used for investment purposes |
-Not tax-free -Can deduct the interest payments from tax returns if funds are used for investment purposes |
-No |
How To Choose The Right Option
Determining the best loan option for your needs will come down to several factors - including how much money you require, your age, how much income you receive monthly, your total debt load, and the total value of your home.
If you want a small amount of money to cover you for the short term, an unsecured loan or HELOC might be enough. However, the amount you will be granted will heavily depend on your current income, debts, and credit score because you are expected to pay that amount back.
A reverse mortgage is often better if you need significant funds or can’t make monthly payments because of your fixed income.
Choosing A HELOC
With a HELOC, the loan is secured against your home, allowing you to access up to 65% of the value as long as it does not exceed 80% when combined with a mortgage. You will still need to prove income and qualify based on your debt load and credit, so if your credit is damaged or your income is limited, you may not qualify for the amount you request.
Like a line of credit, you can withdraw as much as you want, but you are still required to make regular monthly interest payments based on the amount. The loan must be paid in full at maturity (usually ten years) or when the property is sold.
Choosing An Unsecured Loan
If you need a small amount of money and can pay the loan back quickly, an unsecured loan might be worth a look. With an unsecured loan, you will make fixed monthly principal and interest payments until the debt is fully repaid. The maximum amount available to borrow is often restrictive, but most lenders will allow you to borrow up to $25,000 and some to $50,000.
It’s also important to note that the higher the loan amount, the higher the interest rates, which can become exorbitant, upwards of 30 or even 40 percent over time - which is why having a plan to pay the loan back quickly is essential.
Choosing The Reverse Mortgage
If you’re retired, the above two options might not be the best avenue, especially if your taxable income is insufficient to qualify for the loan. A reverse mortgage is often the better solution for seniors on a fixed income because it does not require monthly payments until you leave the property - through sale or death.
Qualification is much easier, as lenders look at the value of your home, the location and condition of the property, and your age - not your income. Those with bad credit can also qualify for a reverse mortgage, pay off their debts from the loan and live a more comfortable lifestyle. And considering you can take out up to 55% of your equity, you can access all the money you need and use it toward anything you like without worrying about having to pay it back until you sell or leave.
Our brokers at Pineapple are here to help you determine the right option for you based on your specific needs and financial situation.
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