By now you’ve read the headlines—not only has the novel COVID-19 pandemic posed a threat to the health of Americans, it’s also jeopardized any sense of financial well-being. As government officials are racing to contain the spread of the disease, they’re also grappling with the secondary effects—including the toll that the crisis has taken on the economy.
As unemployment rates continue to reach new records, millions of Americans are left wondering how they’ll be able to make mortgage payments and other financial commitments, much less save for retirement.
Fortunately, there’s still a largely untapped source of wealth that can be utilized during these financially uncertain times—home equity. In fact, 45 million homeowners, age 62 and older, are sitting on real estate worth an estimated $7 trillion in equity1. When you run the numbers, this works out to about $140,000 per borrower—just imagine the bills you could pay with that.
But as more and more homeowners are looking to tap into the equity in their homes amidst pandemic-related job losses and shutdowns, it’s becoming harder and harder to do so.
HELOCs in the Headlines
One of the most well-known options for leveraging the value of a home is a home equity line of credit, also known as a HELOC. However, during times of economic uncertainty, HELOCs can prove risky – as lenders can freeze HELOC accounts at any time. What’s more, HELOCs have been getting a great deal of press over recent weeks—as major banks and forward mortgage lenders have been forced to suspend HELOC applications and originations. It has even become hard to get a traditional mortgage as banks tighten up borrower qualifications by requiring bigger down payments and increased FICO scores. And if you are an owner of a high value home, you have even fewer choices in today’s market. According to a recent article in the Washington Post2, there are 50-60 percent fewer jumbo loans available right now. But there is some good news, and other options available …
HECM Reverse Mortgage
Whether you’ve heard about a “HECM Mortgage,” “Home Equity Conversion Mortgage,” “HECM Reverse Mortgage,” “HECM Loan,” or “Reverse Mortgage,” it’s all the same thing – a program designed for older adult homeowners to tap into their home equity and get cash to use as they wish. And no matter what you call it, this program offers a number of advantages when compared to a HELOC, including no required monthly mortgage payments*, a credit line that grows over time, no pre-payment penalties and independent, HUD-approved counseling to help you understand all your options. To see all the ways a HECM Reverse Mortgage stacks up against a HELOC, check out our complete comparison chart, here.
Platinum Line of Credit (PLOC)
If your home’s value is $450,000 or more, there’s Longbridge Platinum. Designed for homeowners age 62 and older, Platinum is a proprietary, non-Federal Housing Administration (FHA) reverse mortgage that offers more cash than a Home Equity Conversion Mortgage (HECM) reverse mortgage—depending on your home’s value, up to $3 million. Comparable to a HELOC in terms of a low rate and low upfront costs, Longbridge Platinum is designed specifically to help seniors manage their cash flow with greater flexibility.
For every senior who chooses a reverse mortgage, nearly 11 choose a standard HELOC as a financing alternative3. So, while a HELOC may be a more familiar option, it’s not necessarily the most appropriate one. So how do these reverse mortgage solutions stack up as compared to a HELOC? Let’s take a look at the similarities and differences.
Reverse Mortgage and HELOC Similarities
- Payoff and Redraw
Both a reverse mortgage and a HELOC give you a line of credit with the flexibility to pay off and redraw.
- Home Ownership
Both options allow you to own and keep the title to your home, just as you would with a standard forward mortgage.
Reverse Mortgage and HELOC Differences: The Advantages
- Credit Line Growth
Where a HELOC’s line of credit does not grow over the life of the loan, a reverse mortgage gives you a reusable line of credit that grows.
One of the best features of a reverse mortgage is that it gives you access to the cash you need with the freedom to choose whether or not you want to make payments on the loan. This includes the option to make no monthly mortgage payments* at all, by deferring the loan balance until the last borrower no longer lives in the home. A HELOC requires monthly mortgage payments.
- Non-Recourse Protection
A reverse mortgage is a non-recourse loan, meaning that you and your heirs are not personally liable if the loan amount exceeds the home value when it comes due. HELOC does not offer such protection, so you may be required to pay more than your home is worth.
- Payback Deadline
While a HELOC loan typically becomes due after 10 years, a reverse mortgage does not have any deadline for payback, as long as you meet the terms of the loan and remain in your home as your primary residence.
What do the experts say?
In a recent interview, HECMWorld News sat down with financial expert Martin Andelman, to discuss the current state of the HELOC, and whether or not they are, in fact, a good option for seniors. Andelman advises against HELOCs for retirees, touting them as an option better suited for working people, due to their required monthly payments and accumulating interest. He recommends a reverse mortgage instead, specifically touting Longbridge Platinum as a smarter alternative.
“Everything about [Platinum] is better than a HELOC or as good as a HELOC and yet, for every 11 HELOCs, there is only one reverse mortgage line of credit.”
– Martin Andelman
A growing line of credit, non-recourse protection, no defined payback deadline, and above all else, no required monthly mortgage payments. That’s where a reverse mortgage outshines the standard HELOC.
- 2016 Survey of Consumer Finances, The Urban Institute, November 2017.
* Real estate taxes, homeowners insurance, and property maintenance required.