Home Equity Line of Credit (HELOC) vs. Reverse Mortgage Line of Credit (HECM)
by David Heilman
Are you 62 or older and have you recently considered accessing the equity in your home? Perhaps you would like to make some home improvements, or maybe you have some bills and the extra money could help alleviate the burden. It is estimated that in today’s real estate market, $4.3 Trillion in home equity belongs to the 65+ population. This huge untapped asset will play a major role going forward in planning for retirement as well as sustaining in retirement as we age.
So why are so many people comfortable tapping home equity with traditional financing such as a Home Equity Line of Credit (HELOC) yet hesitant and sometimes flat out dismissive of Reverse Mortgages (HECM)? Reasons may vary, but most neglect to fully recognize the advantages and flexibility of Reverse Mortgage financing, particularly the “Line of Credit” feature. It’s easier to dismiss this option altogether, but is that really the best way to weigh all options? Let’s compare a traditional HELOC with a HECM Line of Credit and hopefully clear up some misconceptions.
With a traditional HELOC, homeowners can access a portion of home equity to draw on for emergencies, home improvements, or maybe even debt consolidation. Whatever amount that is borrowed must be paid back with a monthly payment of interest and principal. Most HELOCs have a 10-year term (meaning possible increase in payments), can be reduced or revoked by the lender depending on housing and economic markets, are not insured by the Federal Housing Administration (FHA), and usually carry a smaller loan to value ratio.
HECM Line of Credit
A reverse mortgage also allows homeowners to access a portion of home equity to draw on for a variety of needs. There are no monthly principal and interest payments required and no pre-defined loan term. The loan remains in force and does not have to be repaid until the borrowers move, pass away or sell the home. As with any home loan the borrowers are required to maintain the property, pay property taxes/insurance, and the home must be the borrowers primary residence. The biggest advantage of a HECM Line of Credit vs. a HELOC is the amount in the line of credit grows by 1.25% above the current interest rate. Therefore, more borrowing power over time and as your needs change. The HECM is also a non-recourse loan due to the FHA Insurance. This feature means you, your heirs, or other assets will not be negatively affected or impacted should the loan balance grow over time and exceed the home value when the home is sold.
With so many older adults tapping home equity with traditional methods, it only makes sense to learn all options. Removing the fear of the unknown and learning for yourself how a reverse mortgage works is the first step to determining which option is best for your needs.