Many homeowners these days find themselves in need of cash but are hesitant to sacrifice the rate on their first mortgage to refinance. One common way to access home equity without giving up your mortgage is a home equity line of credit or HELOC. But, like conventional mortgage rates, HELOC interest rates are high these days. And, once they have drawn funds from their HELOC, borrowers need to make monthly payments on their loan balance. For people on already tight budgets, adding a new monthly payment can make a HELOC unattractive. There is another option available to homeowners 55+ who have substantial equity in their homes. It’s called HomeSafe Second. Here’s how it works and how it differs from the more familiar HELOC.
How a HELOC works
A Home Equity Line of Credit, or HELOC, gives homeowners a way to borrow against their equity when and if they choose. With a HELOC, a specified amount is available to the borrower during a window of time called the draw period. Once a borrower chooses to withdraw money from the HELOC, they will need to begin paying it back much as they would pay back money borrowed from a credit card. Interest will begin accumulating on the amount of money withdrawn and will continue to accrue until the balance is paid off.
How HomeSafe Second is different from a HELOC
For people looking to tap equity without refinancing their first mortgage, HomeSafe Second may offer an alternative to a HELOC. However, it functions quite differently. The main difference being that HomeSafe Second is not a line of credit. Available to homeowners 55+,* HomeSafe Second is a second lien reverse mortgage product that allows borrowers to access equity in the home without refinancing their first mortgage.
Unlike the HELOC, which allows borrowers to decide when and how much money they withdraw from a predetermined amount, HomeSafe Second borrowers take out a lump sum at the beginning of the loan. The loan comes due, along with interest that has accumulated on the balance at the end of the loan. In other words, HomeSafe Second borrowers do not need to make monthly payments on their loans. And because HomeSafe Second is a loan, proceeds are not subject to income tax.
Side By Side Comparison
| HomeSafe Second | HELOC | |
|---|---|---|
| Monthly payment** | No | Yes |
| Interest rate type | Fixed | Variable |
| Funds disbursment | Lump Sum | Line of credit |
| Minimum credit score | 600 (plus financial assessment) | 580-680 (minimum scores vary) |
| Minimum age | 55 for AZ, CA, CO, CT, FL, NV, OR, SC, and UT. 62 for TX. | None |
| Secured by | The home | The home |
| Availability | AZ, CA, CO, CT, FL, NV, OR, TX, UT | All states |
Borrower eligibility and obligations with HomeSafe Second
HomeSafe Second is a proprietary reverse mortgage product offered by Finance of America. Because it acts as a second mortgage, the specific terms differ from the terms on a first reverse mortgage. There is an age requirement of 55+* to be eligible, and borrowers must undergo HomeSafe Second specific counseling with a third-party counselor as part of their application process.
To keep their HomeSafe Second loan in good terms, borrowers must do the following:
- Live in the home as their primary residence.
- Stay current and make all first mortgage payments on time.
- Pay property taxes, hazard insurance (mortgage insurance is not required for HomeSafe Second), and any other home ownership-related fees like HOA dues.
- Keep the home in good condition, including necessary maintenance and upkeep.
Why choose HomeSafe Second over a HELOC?
Deciding whether any loan product makes sense comes down to personal financial situations, needs, and values. Both HomeSafe Second and a HELOC offer legitimate avenues for borrowers to tap their home equity. However, the distinction between how borrowers receive and pay back the two loans is a useful way to compare their advantages.
HELOCs offer borrowers greater flexibility in how much money they will borrow and when they borrow it. HomeSafe Second offers the unique advantage of putting a second mortgage on a home without seeing an increase in current monthly mortgage payments.
Borrowers with an immediate cash need who do not wish to add another payment to their monthly obligations may decide that HomeSafe Second is the right choice for them. HomeSafe Second also offers a way of preserving the rate and terms of their current first mortgage while still taking advantage of a no-monthly payment second mortgage.***
Before making any decision to take a loan, consulting with a finance professional can help you weigh the pros and cons of the product for your situation. When you’re ready to learn more about how HomeSafe Second would work for you, one of our qualified advisors will be happy to talk to you.
*Available to homeowners age 55+ in AZ, CA, CO, CT, FL, NV, OR, SC, UT, and age 62+ in TX.
** The borrower must meet all loan obligations, including meeting all loan obligations under the first lien mortgage, living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
*** Terms and conditions on the first lien loan apply. Must meet combined loan value requirements based on a satisfactory appraisal.
