The Reverse HELOC for Business Owners
The word “Reverse” in this context means a Reverse Mortgage. It is called “Reverse” because instead of you making payments to the Mortgage Lender, the lender could make payments to you.
I say “could” because this is a financial product which can be structured in different ways, one of them being you receiving payments.
Most people associate a Reverse Mortgage with struggling seniors unable to make their mortgage payments and while this has certainly been a way in which Reverse Mortgages are used, there is another side to these financial products that is seldom addressed.
Before I quickly go over some of the highlights, let me address the first and foremost misconception: potential borrowers assume that since the Lender is paying you therefore the house now belongs to them. This is incorrect, title and ownership to the home remain with you, the borrower. A reverse is a loan.
You may ask then how does the lender make money? For the answer I have to delve a bit into the world of Secondary Financing, this means what happens after you sign on a loan: your loan, whether normal or reverse, becomes a financial instrument that is then traded in the International & Domestic Market for financial instruments. There are oceans of money domestically and around the World seeking these types of financial instruments,
These Oceans of money used to mainly invest in government bonds, however, governments are increasingly becoming risky and these gigantic investors are diversifying into real estate, not houses, but financial instruments backed up by real estate.
In short, there is a tremendous financial appetite to buy these things and the profit, for these investors, is made on the trading of these mortgages, wether “normal” or of the reverse kind.
In this table I would like to make a comparison between a standard regular Home Equity Line of Credit (HELOC) given by a bank or credit union and a reverse HELOC:
For a traditional HELOC with a Bank or Credit Union, you need a high credit score, sufficient income shown on tax returns, a lot of paperwork and rules which sometimes don’t make any sense, the whole process is emotionally draining and takes between 30 to 45 days.
However, the lender/bank, could cancel your HELOC at any time! even if you never missed payments and even if your utilization rate was low.
The interest you pay is based on the Prime Rate, which is determined by banks as to how much they would charge their best customers. This means the Prime Rate is particularly sensitive to market forces.
Lastly, your HELOC limit is set from the beginning and it happens that in addition to canceling your line of credit, the lender may unilaterally decrease your line amount even if you did nothing wrong! you have no control.
In contrast, your age qualifies you for the Reverse HELOC, not your income, nor your credit, you may or may not pay it, or pay it at your own pace! The credit line limit increases every year, the HELOC can never be unilaterally canceled by the lender, nor decreased and lastly your rate is determined by the Constant Maturity Treasure, or CMT, which represents the monthly average yield of a range of Treasury securities, meaning the average investors are paying for Treasury obligations. While this Index is also affected by market forces, the Prime Rate is private and tends to be more volatile.
Because Reverse Financial Products are associated with low income borrowers or borrowers in distress, no attention is being given to the tremendous potential they have in providing financing for older business owners!
The Reverse HELOC provides the senior business owner with a stable source of financing that can never be taken away! and, last by not least, at competitive rates that would require a normal borrower seeking a bank HELOC to have a high credit score and high income!
Most business owners might get approved for this type of financing because the barriers are low, example:
62 years of age or older.
A primary residence with a small or non existing mortgage.
Sufficient income to pay for property taxes, homeowners insurance & have a minimum of approximately $600 per month in discretionary income.
A credit profile that shows no major credit derogatory events in the last 2 years.
The score is not important unless it is less than 620, however the score does not influence pricing. On a regular HELOC, the lower the score, the higher the rate.
For most business owners, the above qualifications are easy to meet. Their discretionary income is more than $600/m, their scores are usually above 620 and they don’t have major derogatory credit events.
Summary of Advantages:
Easier to get approved if you are retired or not working.
Your income or lack of it is not a factor, you need minimal income to pay for: property taxes and insurance plus a leftover (residual income) of at least $600 per month - as of this writing.
Don’t need a high score to get the best rate.
Rate of Interest is generally lower than regular Home Equity Line of Credit.
Loan Limit increases every year.
It cannot be canceled by the Lender.
If your spouse is included in the original loan application she could continue to use it after your passing.
Payments are optional!
There is no “Draw Period”.
Most Home Equity Lines of Credit (HELOC) allowed you to use them for 10 years. As of this writing, this has been reduced to 5 years for some credit unions and 3 years overall. This is called the “Draw Period”.
After the draw period has come to an end, the balance on your Home Equity Line of Credit is frozen and amortized, usually, over 20 years.
Not so with your Reverse Home Equity Line of Credit! you can keep using it. This means you could make payments and withdraw funds, within your credit limit, for as long as you, and/or your spouse lives!
This is extremely powerful since as time goes by, in general your home appreciates in value, and your reverse home equity loan also keeps increasing in value.
You have an ever increasing line of credit at literally, your fingertips!
This is an opportunity that is seldom promoted or understood.
While these types of financial instruments are available I encourage you to get a no obligation quote from us and explore whether this could be a source of financing for your business activities!
Disclaimer: This general information is NOT a substitution for the advice of an attorney, accountant, and/or financial planner. Before you decide to pursue a reverse mortgage, you should carefully consider your individual circumstances so you can make a wise decision about the most valuable asset you may own—your home. Factors to consider include whether the proposed reverse mortgage is a recourse or nonrecourse loan, whether the loan would have a fixed or adjustable interest rate, and/or the current and projected market value of your home.
