Equity credit or reverse loan: which best suits you?

Dear Ms. Mortgage Maven,I am 65 years old and need about $30,000 to help my daughter pay for college. My house is worth about $500,000 and I owe about $120,000 on it. I would like a home equity line of credit but my credit score is not the best because I went through bankruptcy several years ago. I am a senior citizen and receive social security, and I also have a part-time commission-only job. My combined income is about $20,000/year. Can I get a home equity line of credit?

-SD

Dear SD,

Two things immediately jump out at me. First, many people think that their credit score is lower than it actually is and second, you should compare getting a home equity line of credit to getting a reverse mortgage and see which one makes the most sense for you.

If you have been paying your bills on time since your bankruptcy, your credit score may be higher than you think. You should look at your credit report not just to learn your score, but to verify that it contains only accurate information. Especially since you have been through a bankruptcy, it is important to make sure that the collection accounts that were discharged through the bankruptcy are properly noted on your report. For example, if your bankruptcy was discharged in April 2003, those collection accounts should not be reported as current collections.

You want a relatively small amount of money, but you also are retired and do not make a lot of money. Do you enjoy working your part-time commission job? Do you think it could soon bring you more income for you to live comfortably for several years? If so, then a small home equity line of credit may make sense, but remember that you will be paying your first mortgage (on $120,000) and a second mortgage (on $30,000) every month. If you answered no to both questions above though, you may want to consider a reverse mortgage.

A reverse mortgage allows you to use the equity in your home without having to make any sort of monthly payment. Unlike regular mortgages, there are no income or credit requirements, and the money you receive is not taxed by the government because it is a loan, not income. You can choose from a lump sum payment, a line of credit, a monthly payment to you for the rest of your life (or for a fixed duration) or a combination of the three.

The amount of money depends on what type of reverse mortgage you take (FHA or regular); your age; the appraised value of your home; and current interest rates.

The only requirements are that you are 62 or older, live in the property as your primary residence, pay off any existing mortgage(s) (in your case the $120,000) and attend a free session with a housing counselor. You will also be responsible for paying your property taxes and homeowner's insurance each year.

The most common misconception about a reverse mortgage is that the bank will own your house when you die or force you to move out while you are still alive. That is not so. When you pass away, your heirs will sell or refinance the house to pay off the reverse mortgage. If there are extra proceeds, it will go to the heirs. If the proceeds are not enough to pay off the balance of the loan, the heirs will not be held responsible for repaying it.

Another commonly held belief is that reverse mortgages are costlier than traditional mortgages. In your situation, that is particularly true. Home equity lines of credit have little if any costs to you (no title fees or loan fees), and a reverse mortgage will have upfront loan fees of two percent, plus you will have to pay other closing costs. Keep in mind that these fees can be paid out of the balance of the loan.

Many seniors mistakenly believe that their adult children will want to keep the house once they pass away. The reality is that adult children have homes of their own, and do not want to uproot themselves and their children to move back to the home they grew up in. Best of luck.

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage lender in Fort Washington, MD. Call her with your questions 202-607-4449 or email her at Jessica@msmortgagemaven.com and you may get your question answered in this column.