Blog content updated: July 7, 2022
Besides posing a serious health threat to America, the COVID-19 pandemic also jeopardized any sense of financial well-being. As government officials raced to contain the spread of the disease, they also had to grapple with the secondary effects, including the devastating toll that the crisis has taken on the economy.
With inflation skyrocketing, 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 accessed during these uncertain times—home equity. In fact, seniors age 62 and older own more than $10.1 trillion of home equity—the highest amount of housing wealth on record1.
But as more homeowners are looking to tap into the equity in their homes, it’s becoming harder and harder to do so.
HELOCs in the Headlines
A home equity line of credit (HELOC) is probably the most well-known option for leveraging the value of a home. However, during times like these, HELOCs can prove risky, as lenders can freeze HELOC accounts at any time. In fact, during the first year of the pandemic, major banks and forward mortgage lenders were forced to suspend HELOC applications and originations. It’s even become hard to get a traditional mortgage, as banks tighten borrower qualifications by requiring bigger down payments and increased FICO scores. And if you’re 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% fewer jumbo loans available right now. But there is some good news, and other options available.
HECM Reverse Mortgage
Whether you’ve heard “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 it offers a number of advantages 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 you own a high-value home, another option is a proprietary (or jumbo) reverse mortgage, such as Longbridge Platinum. Designed for homeowners age 55+3, Platinum is a proprietary, non-Federal Housing Administration (FHA) reverse mortgage that offers more cash than a HECM reverse mortgage—depending on your home’s value, up to $4 million. Comparable to a HELOC in terms of a low rate and low upfront costs, Platinum is designed to help seniors manage their cash flow with greater flexibility.
While a HELOC may be a more familiar option, it’s not necessarily the most appropriate one. So how do reverse mortgage solutions compare to a HELOC? Let’s take a look at the similarities and differences.
Reverse Mortgage and HELOC Similarities
- Payoff and Redraw
Both give you a line of credit with the flexibility to pay off and redraw.
- Home Ownership
Both allow you to own and keep the title to your home, just as you would with a standard forward mortgage.
Reverse Mortgage Advantages vs. a HELOC
- Credit Line Growth
Where a HELOC’s line of credit does not grow over the life of the loan, a HECM offers you a reusable line of credit that grows.
A reverse mortgage gives you access to the cash you need plus the freedom to choose whether to make monthly payments on the loan or 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 the home is sold and the loan is repaid. A HELOC offers no such protection, so you may have 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 the home as your primary residence.
What do the experts say?
In an episode of The RMD Podcast, Dr. Wade Pfau—professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com—advises that retirees who have a reverse mortgage to draw from have a better chance of weathering financial storms, such as market downturns and unexpected events like the pandemic.
“[You] get a source of spending so that you don’t have to use as high a distribution rate from your investment portfolio,” Pfau says. “In particular during today’s environment, helping to leave the portfolio alone and not spend from it after a market downturn, and sourcing that spending from the reverse mortgage line of credit, can really help to preserve the investment portfolio, and to create long-term positive impact net as a piece of a reverse mortgage.”
For every senior who chooses a reverse mortgage, nearly 11 choose a standard HELOC as a financing alternative4. But with a growing line of credit, non-recourse protection, no defined payback deadline—and above all else, no required monthly mortgage payments—perhaps more seniors should consider a HECM before taking out a standard HELOC.