HECM (Reverse Mortgage) vs. HELOC: Leveraging Home Equity with a Line of Credit
Did you know that it is estimated in today’s real estate market that $4.3 Trillion in home equity belongs to the 65+ population? There’s no doubt that as we age, this untapped equity will play a major role in both planning and sustaining our retirement.
The good news is that if you are 62 or older, there’s more than one way to access your home equity to help meet the challenges of retirement financing. The question is why do many people choose traditional financing such as a Home Equity Line of Credit (HELOC), yet often refuse to consider using a Reverse Mortgage (HECM). Sometimes it’s due to misconceptions or lack of awareness about the flexibility and advantages of a Reverse Mortgage, particularly the line of credit option. It is extremely important to compare all your options so that you can make an informed decision about what choice is best for you. Let’s look at some of the differences.
Traditional HELOC:
- Homeowners can have access to a portion of their home equity to help meet their financial needs
- Monthly payments of principal plus interest are required on the amount borrowed
- A 10 year term applies to most HELOCs which means there could be a possible increase in payments.
- A HELOC can be reduced or revoked by the lender depending on the economic and housing markets.
- They are not insured by the Federal Housing Administration (FHA)
- They usually have a smaller loan to value ratio
And while the HECM Line of Credit is comparable to a traditional Home Equity Line of Credit (HELOC) in that it also allows homeowners access to a portion of their home equity it does offer some distinct advantages.
HECM Line of Credit:
- No monthly repayments 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.
- Line of credit cannot be reduced or revoked by the lender, as long as loan obligations are met(It must be your primary residence and As with any home-secured loan, Reverse Mortgages (HECM loans) require you to pay all property-related taxes, insurance, HOA dues and maintain the property.
- Federal Housing Administration (FHA) insured loan and a non-recourse loan. (This protects you, your other assets, and your heirs from any negative impact if the loan balance grows and exceeds the home value when it is sold.)
- The biggest advantage of An HECM Line of Credit is its growth feature. The unused amount of funds available in the Line of Credit will grow monthly by 1.25% above the current interest rate, independent of any change in home value. This feature can provide more borrowing power over time and additional funds in the future as other retirement savings may be depleted and your needs change. So if you are considering tapping some of your home equity to help meet your financial needs, whether to make some home improvements, pay off some bills, pay for healthcare costs, or just have some extra money available for those unexpected needs, learn about all your options. Find out how a Reverse Mortgage works and whether it could be the best option for you.