- Personal Finance
Difference Between HELOC Vs Reverse Mortgage Vs Flip Loans
HELOC loans are normally taken for construction. For instance, you get approval for $100,000 and get a withdrawal period of 5 years and then you can withdraw any amount within the approved amount any time. You will pay interest, only for the amount you withdraw. After the withdrawal period, you start paying back with principle and interest. It is not very same as credit card because it is secured.
Reverse mortgages have a different purpose compared to normal forward mortgages. With a forward mortgage, the borrower’s income is used to repay debt and this builds up equity in the home. But with a reverse mortgage, the borrower takes the equity out in cash. So with a reverse mortgage:
• the debt increases; and
• the home equity decreases.
It's just the opposite, or reverse, of a forward mortgage. With a reverse mortgage, the lender sends you cash and you make no repayments. So the amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home's value is growing at a high rate.
When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home's value decreases, there may not be any equity left at the end of the loan.
In short, a reverse mortgage is a "rising debt, falling equity" type of deal.
Flip loans are a type of financing that is used when a borrower is able to obtain a property at an unusually low price with the intent of fixing up the property. Then, within a few months, the property is sold at a fair market price. Many lenders will not do this type of loan because of the short period of time it will be serviced, so most of the people who go for flip loans, normally sell their house in a few years. They normally blow up the price citing the improvements they have made to the house and sell it in the market at double the rate at what they bought. This is normally known as flipping and is considered as fraud under US government. We can normally call it flip sales.
Now you must be wondering if it is considered as a fraud, does it mean that they don’t fall under the governance of Freddie Mac and Fannie Mae? For your information, Fannie Mae covers this types of loans under the category property flipping. To avoid such fraud activities, Fannie makes sure that as part of the loan origination process, it is critical for the lender to analyze and review the sale(s) of the subject property and the sale price trend in relation to the appraiser’s opinion of value to confirm that they are reasonable and representative of the market. They also assess the accuracy of their data sources. Else Fannie Mae will not buy such loans. Lender would do a case-by-case analysis before funding to make sure there is no appraisal fraud or straw buyer (a person who buys on behalf of somebody else); otherwise, they will decline.