Reverse Mortgage HECM vs HELOC

Reverse Mortgage HECM vs HELOC

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Home Equity Conversion Mortgage (HECM) or Home Equity Line of Credit (HELOC)? How do you know you are making the right choice? Both – HECM and HELOC provide a pathway to your home equity for required funds. But, there are some key variations that help you decide the one that is best for you. At South River Mortgage, we help you weigh out all your options.

The difference between HECM and HELOC can clearly be seen in the repayment plans. For a HECM, otherwise known as a reverse mortgage, borrowers are not required to pay back provided they reside in that home as their primary residence. For HELOC, borrowers are required to repay the loan within a stipulated time frame, usually 10 years.

Many older homeowners typically consider two mortgage products as tools to supplement their retirement, a HECM or a HELOC. A Home Equity Conversion Mortgage (HECM), or reverse mortgage, is a federally insured loan designed to provide seniors with access to their home’s equity either through a lump sum, monthly payments or a line of credit. A Home Equity Line of Credit (HELOC) also enables borrowers to tap into their homes equity through a credit line. While both products allow the borrower to maintain ownership to their home and access a line of credit, there are a number of key distinctions borrowers should be aware of before proceeding with a HECM or HELOC.

Borrower Goals 

Before pursuing either a HECM or a HELOC, borrower’s should first consider what goals they are hoping to achieve by tapping into their home’s equity. Older borrowers looking to retire, remain in their home, and/or satisfy their long term living expenses should consider a HECM reverse mortgage. This is a flexible option for elderly (62+) borrowers which enables them to retire with financial security while remaining the legal owner of their home. HECM reverse mortgages also allow borrowers to continue receiving Social Security or Medicare benefits. 

If a borrower is in need of fast cash for a short-term solution and they are still receiving income, taking out a HELOC may be the best option for them. Unlike a HECM, a HELOC is a second lien on the home with a fixed amount for the borrower to draw from. If the borrower does not have the funds to repay on a relatively short-term basis, a HELOC could end up hurting them more in the long-run. 

Qualifications

HECMs are available to homeowners age 62 and over who are seeking a reverse mortgage on their primary residence. To qualify for a HECM, the borrower does not need a particularly strong credit score. Meanwhile, credit score and income level are both taken into consideration when applying for a HELOC. 

Additionally, HECM applicants are required to meet with a third-party HUD-approved counselor before they are permitted to move forward in the HECM process. By doing so, the borrower begins the process with full disclosure and understanding of the mortgage product they are pursuing. Counseling is not required for HELOC applicants. While this is one extra step HECM applicants must take, it enables them to seek access to their home’s equity with confidence. 

Line of Credit 

The open line of credit that can be made available with a HECM gives the homeowner significantly more borrowing power than a HELOC. While HELOC borrowers pay an annual fee to withdraw limited funds over a fixed period of 5-10 years, HECM borrowers pay no annual fee and can withdraw unlimited funds from the line of credit as long as they continue to meet their program obligations. Additionally, if a HECM borrower is able to keep up with their homeowner responsibilities, their unused line of credit will actually grow overtime at the current expected interest rate with no risk of being revoked or frozen. A HECM line of credit can actually mature to become larger than the actual value of the home as time goes on. Thus, savvy borrowers can confidently payoff their debts while retaining substantial funds to use in an emergency, leave for their heirs, etc. 

Unfortunately, this is not the case for a HELOC loan. In fact, HELOC lenders are known for suddenly reducing, freezing, or closing the line of credit with little notice to the borrower. This often occurs if the borrower has not been actively withdrawing funds. For this reason, a HELOC is not a suitable long-term safety net. 

Payments 

When it comes to paying off home equity loans, HECM reverse mortgages stand out in comparison to HELOC loans because they do not require any monthly payment. As long as the borrower continues to reside in the home as their primary residence and is up to date with their property taxes, insurance, and other homeowner maintenance fees, they are permitted to defer payment until the loan becomes due (either at the sale of the home or the passing of the last living borrower). However, if the borrower is willing and able to make prepayment on the loan, they will incur no penalties. 

A HELOC holds the borrower to much stricter payment guidelines. For starters, the borrower is required to make monthly interest only payments. Thus, the debt will not be paid down over the life of the loan unless the borrower intentionally makes additional payments. However, with a HELOC a prepayment penalty is typically charged. 

Not to mention, when interest rates increase or borrowing amounts increase, the monthly HELOC payments also increase. However, if this occurs with a HECM, there are still no payment requirements. 

Additionally, HECMs are a safer alternative to HELOCs because they are non-recourse. This means that even if the home is not worth enough to settle the entire balance, the borrower will never have to repay more than the value of the home. As for HELOCs, the borrower will end up owning more than the home is worth if the home values drop. 

Last but not least, at the maturation of a HELOC, the bank recalculates the payment due based on a new amortization schedule. This balance is assumed to be paid over a very short period of time, leaving many borrowers in a rough situation. Moreover, HECM loans protect borrowers against recast. 

Reverse Mortgage HECM Vs. HELOC

Overall, HECM reverse mortgages are typically a safer and more flexible mortgage product for senior borrowers looking to tap into their home’s equity. See the reverse mortgage HECM Vs. HELOC chart below for a side by side comparison of the two mortgage products. 

Criteria

HECM

HELOC

Maintain Home ownership

Second Lien

Strict Credit and Income qualifications

FHA Approved

Age Requirement

✔ 
(must be 62+)

Counseling

Line of Credit

Line of Credit Growth

Line of Credit Reduced or Frozen

Annual Line of Credit Fee

Line of Credit Withdrawal Limit

Due Date

✘ 
(not due until sale or passing)

✔ 
(Usually 10 years)

Monthly Payments

Prepayment Penalty

Recourse

Recast

HECM Vs HELOC Line of Credit

Borrowers sometimes get confused when they hear the definition of a Home Equity Conversion Line of Credit (HECM LOC), otherwise referred to as a reverse mortgage equity line of credit. It gets pretty confusing in relation to the traditional Home Equity Line of Credit (HELOC). Both loans share a similar structure in that the lines of credit are both secured against your home. In addition, both loans accrue interest only on the amount borrowed and both rates are variable as well.
In spite of all of these similarities, there are a number of differences that would easily make a reverse mortgage line of credit distinct. And while the option that would best suit you depends on your situation, the reverse mortgage line of credit boasts of certain advantages over the traditional HELOC, particularly if you’re a senior.

In order to get a more comprehensive understanding, here’s a comparison chart:

HECM LOC

HELOC

Payments

No monthly mortgage payments from you. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance

Principal and interest must typically be paid monthly.

LOC Growth

LOC allows unused line of credit to grow at the same rate the borrower is paying on the used credit, thus the line of credit amount grows.

Does not grow. What you signed up for will remain the same.

Due Date

Typically when the last borrower leaves the home, or does not pay taxes and insurance, or otherwise does not comply with loan terms.

Typically due at the end of 10 years.

Pre-Payment Penalty

No penalty

Usually has penalty

Government Insured?

Yes, by the Federal Housing Administration (FHA).

Usually not insured by the FHA.

Annual Fee

No fee to keep the loan open.

Annual fee to keep the loan open.

 
Note that in order for both loans to stay active, borrowers must continue paying homeowner’s insurance, property taxes, home maintenance as well as stay within the terms of the loan.

Which To Opt for

The main edge that a HECM has over a HELOC is that it doesn’t require that you make monthly payments to the lender and this is why a lot of seniors opt for it. You have access to your line of credit without necessarily having to make a monthly payment. When you take out a reverse mortgage loan, you would only be required to pay your homeowner’s insurance, property taxes as well as maintenance costs for the property.

Outside of these, repayment of the HECM Line of Credit is only due after the last borrower no longer lives in the home. Provided the borrower keeps up with all loan terms and make the various payments necessary for maintaining the property, then no repayment would be prematurely required.

On the other hand, the HELOC requires that the borrower makes a monthly payment instantly.
One other advantage that reverse mortgages have over the HELOC is that you can always count on the HECM line of credit to stay open and available. HELOCs on the other hand are well known for suddenly dropping in value or ultimately getting closed, particularly if the borrower has not been actively drawing from it.

The twist here is that borrowers may decide to have a line of credit and only use it only when it is entirely necessary. Having to keep drawing on the line of credit in order to keep it active and open is a pretty inconvenient requirement and could grow increasingly frustrating. Furthermore, discovering that your line of credit has been decreased can be pretty disconcerting. 

 

Would you like to explore a loan for your situation? Call us at (844) 230-6679 if you live in one of the following states. As your local reverse mortgage broker, we work with several lenders across different states and cities and provide required consultation service with no pressure or obligation.

 

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