HECM vs. HELOC: What are the advantages?
Adrian Prieto: When it comes to leveraging the value of a home, a home equity line of credit (HELOC) is probably the most well-known option. However, it’s not necessarily the most appropriate option for older homeowners, ages 62+.
Unlike HELOCs, reverse mortgages and jumbo reverse mortgages are designed specifically to help seniors manage their cash flow. They also offer senior homeowners more flexibility – most notably, through optional monthly mortgage payments1. And with a HECM, seniors cannot be locked into any possible payment spikes. That’s why it’s a much better product for retirees. Unfortunately, many who could benefit from it have never considered it.
For example, many people get a HELOC while still working—but the problem arises ten years later when they’re living on retirement cash flow that’s about 75-80% of what it used to be. And when their HELOC payment suddenly spikes up ten years after they’ve retired, it may create a serious cash flow problem. One that often results in customers refinancing from a HELOC to a reverse mortgage, once they realize it’s the better choice in the long run
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A HECM is insured by the Federal Housing Administration (FHA)2 and cannot be frozen or reduced at any time. But perhaps the biggest benefit of a HECM is that, unlike a HELOC, there are no monthly mortgage payments required1. The borrower simply needs to pay taxes, insurance and keep up to date on home maintenance. And with the average monthly payment on a 30-year fixed mortgage now hovering around $2,064 – this presents a major savings opportunity every month.
The HECM program also offers more flexibility as compared to a HELOC. While HELOCs require money to be disbursed as a revolving credit as needed during a designated draw period, HECM offers several options for receiving funds. With a HECM, money can be disbursed either via a one-time lump sum, monthly payment, line of credit – or a combination of these methods. Plus, any unused portion of a line of credit can grow over the life of the loan, which is not the case with a HELOC.
Another advantage of HECMs over HELOCs is that they are less risky in terms of repayment. With a HECM, there is no deadline for paying back the loan. The loan does not become due until the final borrower no longer lives in the home, but they must continue to meet loan terms and use the home as their primary residence. And since a HECM is a non-recourse loan, the borrower and their heirs are not required to pay back more than the value of the home.
With a HELOC, the loan typically becomes due after ten years. However, making interest-only payments or paying the minimum required each month will not pay off the line of credit by the end of the 10-year period. In these cases, the bank may require a balloon payment – a larger, lump-sum payment that covers any remaining balance. This requires the borrower to potentially come up with thousands of dollars at once to eliminate their debt.
HW: How are HECMs especially beneficial for homeowners age 62+?
AP: For homeowners ages 62 and older, HECMs offer a variety of benefits over HELOCs. In terms of loan eligibility, a HELOC requires borrowers to qualify based on credit score and income. For those homeowners who are retired or adjusting to a limited or fixed income, this is not ideal. With a HECM, credit score and income are not the sole determining factors. Instead, the borrower must simply be a homeowner at least age 62, use the home as their primary residence and have sufficient equity available in the home.
Another advantage of HECMs over HELOCs is that they’re FHA-insured and offer unique borrower safeguards. Along with the non-recourse protection mentioned earlier, HECMs also require borrowers to attend independent HUD-approved counseling as part of the process. This counseling session provides potential borrowers with the education and resources to decide whether the HECM is the right option, explore alternative financial solutions and provide support throughout the entire application process.
Senior homeowners also appreciate the HECM because there are not any annual fees to keep the loan open. This is not the case with a HELOC.
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