As a reverse mortgage originator, you would think that answer would be simple for me: always get a reverse mortgage.
However, my goal here is to educate and provide transparent information so that you can make the best decisions regarding your financial future.
It really does no good to lead a borrower down a path that ultimately isn’t the most beneficial for them.
The last thing I want is a client who is disappointed or that feels duped.
Given that rationale, I’ll cover a topic today that comes up quite a bit when I initially talk with potential Home Equity Conversion Mortgage customers (remember: HECM is the technical industry term for reverse mortgages).
The bottom line is that for either a HELOC or a HECM, you need to have equity in your home.
Figuring out what your financial needs are, how you intend to use the money, and what your long-term goals are substantially effect which mortgage products you should be considering.
Each product has its own set of stipulations, requirements, and caveats.
Both will give you access to the equity you have built up in your home – each in very different ways though…
There are advantages and disadvantages to each home equity product (and frankly, all mortgage products for that matter), and the leveraging of your home to access the funds via these options can put your home ownership in jeopardy if you don’t follow the rules and/or make timely payments.
The most important thing you can do upfront is:
RESEARCH, RESEARCH, RESEARCH!!
I can’t stress this enough.
Take the time to Google all the terms I mention and to review the articles not only on my site, but on those of trusted sources elsewhere.
Once you’ve done all of that, contact a reliable professional (such as me or any of my colleagues) to sit down and discuss what your options are before moving forward.
At the end of the day, the one aspect of this process that will serve you better than any sum of money is achieving peace of mind.
Make sure you feel as if you’re certain that the option you’ve chosen is the best for your situation and that you can honestly sleep at night knowing that you made the right decision for you and your family.
And with that in mind, let’s talk a little more about HECMs and HELOCs…
How is a HECM Different From a HELOC?
I’ll approach this part of the article as if you have no prior knowledge of either product so that we can lay out all the pertinent similarities and differences between each mortgage option.
And it’s also important to note that for a true apples-to-apples type of comparison, I’ll be focusing on the traditional HELOC and the HECM line of credit products.
First of all, let’s start with definitions:
- HELOC – Home Equity Line of Credit
- This is what people normally refer to as a “2nd Mortgage” on their property.
- It is a loan that a bank (or other lender) extends in the form of a line of credit (LOC) that utilizes the equity in a borrower’s home as the collateral.
- Under the terms of the HELOC, the lender agrees to extend a maximum LOC to the borrower for a term that is determined prior to closing.
- Line of credit maximum is based on available equity and qualified interest rates at time of closing.
- During this term, the borrower will repay the LOC funds used + interest in order to satisfy their responsibilities as per the loan agreement.
- As you pay down the principal balance on the LOC, you can once again use the available funds as you wish.
- Once you pay off the LOC, the loan is satisfied and your equity is once again available for use.
- HECM (LOC) – Home Equity Conversion Mortgage (Line of Credit):
- Commonly known as a “Reverse Mortgage Line of Credit”.
- It is a type of loan available to adults, age 62 and older who have a substantial level of equity in their property or who own their home outright.
- Other than age requirements, HECM lenders require (by law) that certain conditions be met:
- Borrower(s) must occupy the home as their principal residence.
- Borrower(s) actively maintains the property (pays all taxes and insurance, makes necessary repairs, and keeps the grounds presentable).
- HECM LOC funds are based on:
- Current interest rates.
- Age of youngest borrower or non-borrowing spouse.
- The appraised value of the home or the FHA limit of $636,150 (whichever is less).
- As you draw funds from the LOC, interest is applied, however, the unused portion of the LOC grows over time commensurate with the agreed upon interest rate at closing (much like a savings account).
- These funds are available until the borrower(s) die or the property is sold and the loan repaid.
Now that we have the basics covered, let’s take a look at the significant differences between these two mortgage options…
- Differences (the important ones for your decisioning purposes):
- HELOCs need to be paid back monthly, whereas you make no monthly payments with a HECM.
- HECM closing costs tend to be slightly higher than with the typical HELOC.
- HELOC funds are available for a set period of time whereas HECM LOC funds are available indefinitely.
- HECM LOC available funds increase over time and achieve growth whereas HELOC funds diminish over time as interest adds to the borrower’s debt.
- HELOCs are available to homeowning adults of all ages whereas HECM LOCs are only available for those age 62+
- HELOC borrowers may find it harder to qualify for a loan than HECM borrowers if their debt-to-income ratio isn’t favorable.
- HECM LOC borrowers are required to live at the home borrowed against while HELOC borrowers can live anywhere.
Simply looking at the basic information above, it’s clear that there are some very important distinctions between each of these types of loans you will need to consider when making your decision.
Make sure to educate yourself even further about each product, starting with my knowledge base that will give you detailed insight into the reasons and strategies for utilizing HECM products to your advantage.
Which is Better for Me – a HECM or a HELOC?
This is the part where I attempt to give you my most unbiased, useful opinion possible.
And please keep in mind: Even though I work in the reverse mortgage business, I am dedicated to providing potential borrowers with the most accurate, helpful information that will assist them in making their financial decisions – even if that means getting a reverse mortgage is not one of them.
So, here goes…
If you’re 62 and you meet all the requirements, then a HECM is most likely the best choice.
The reason I say this is that it frees you from the burden of having to make monthly loan payments when you are potentially looking at retirement or are in a position where you may no longer be able to generate substantial income.
Yes, the closing costs can be slightly more (and this point has been greatly exaggerated in the media), but the benefits of the HECM product far outweigh the costs associated with it.
The only real scenario where a HELOC may be the better choice is when you’re looking for a short-term cash solution that you intend to repay quickly (or if you intend to sell the house).
Otherwise, the HECM affords you freedom that the HELOC can’t.
For instance, you can buy a home with a HECM without having to make monthly payments.
You can also sit on your LOC indefinitely with a HECM and it will not close or become unavailable after a predetermined amount of time.
Bottom line: For seniors, HECM loans can be life-changing.
They infuse cash into your life without the need for monthly repayment.
Of course, the bill will come due when you pass on, but the same is true with any type of mortgage.
Again, I encourage you to do the research for yourself and feel free to reference my Knowledge Base for more in-depth information about reverse mortgages and how they can be used to your benefit.
Make sure that if you have any questions, comments, or concerns, please contact me anytime via email at [email protected] or by clicking on the button below.
Once you’re ready to move forward, call me so we can have a conversation. If you live outside of the greater Dallas area, feel free to use my toll-free number: (800) 304-4143
Or if you live in my neck of the woods, call me locally at: (972) 803-3073
Either way, make sure to get all the info you need before making a decision and talk to the right people before signing on the dotted line.
Make sure to check back regularly for more real-world reverse mortgage information and analysis.