HELOC or Reverse Mortgage?
Which one should I get—HECM reverse mortgage or HELOC?
— John
The consultants at Longbridge Financial can help you understand your options.
Although a Home Equity Conversion Mortgage Line of Credit (HECM LOC) and a Home Equity Line of Credit (HELOC) are both credit lines secured against your home’s equity, they differ in several key ways. Whether a HELOC or a HECM reverse mortgage is right for you will depend on your situation and financial needs. In the comparison below, we have outlined several important differences between these two types of loans.
HECM REVERSE MORTGAGE LINE OF CREDIT1 VERSUS HOME EQUITY LINE OF CREDIT
| HECM Reverse Mortgage LOC | HELOC | |
|---|---|---|
| Payments | Monthly mortgage payments optional (keeping up with property taxes, insurance, and maintenance required) | Requires monthly mortgage payments. |
| Available Funds | Lender cannot reduce the amount available to you. | Line of credit can be reduced or frozen by the lender at any time. |
| Line of Credit Growth | Unused portion can grow over the life of the loan.2 | Line of credit does not grow over the life of the loan. |
| Payback Deadline | None, as long as you meet the terms of the loan and remain in your home. | Typically comes due after 10 years. |
| Pre-payment penalty | No penalty for early repayment. | Pre-payment penalties can be charged in some cases—make sure to ask your lender. |
| Insured | Insured by the Federal Housing Administration (FHA). | Not FHA insured. |
| Counseling | Independent, HUD-approved counseling provided to ensure that you fully understand your options. | No independent counseling provided. |
| Qualifications | Must be a homeowner age 62+ and use the home as a primary residence. | Must qualify based on credit score and income. |
| Options for Receiving Funds |
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| Credit Requirements |
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| Annual Fees | No fees to keep the loan open | Annual fee to keep the loan open |
HECM vs. HELOC – Key Factors to Consider.
Before deciding between a HELOC vs. a HECM reverse mortgage, consider your short-term and long-term goals for accessing your home’s equity. If you are age 62 or older, you have several options available that other homeowners may not. Start by asking yourself the following questions:
How do you plan to use the money? If you need cash for living expenses and plan to remain in your home for the foreseeable future, a HECM reverse mortgage may be your best option. A HECM loan can also work to your advantage if your goal is to reduce monthly expenses by eliminating your monthly mortgage payment. You’ll need to continue paying property taxes, insurance, and maintaining the home as you do now. If you have sufficient income, but need fast cash for a one-time or short-term need, a HELOC may make sense.
Are you considering using a line of credit1 as a safety net? Many homeowners who have taken out HELOCs have quickly discovered that these types of loans are notorious for suddenly decreasing the amount available or closing the line of credit all together. This is common if the HELOC is not regularly drawn upon and used. A HECM line of credit will remain open and available even if it’s not regularly used. In fact, the HECM line of credit is commonly used by homeowners to set aside funds for unexpected expenses or emergencies because it cannot be reduced, as it is prohibited by the laws that govern HECM reverse mortgages.
How long do you plan to stay in the home? If you are planning to “age in place,” a reverse mortgage line of credit offers some compelling advantages: no required monthly mortgage payments as long as you meet the loan terms, a line of credit that can grow2, and no mandatory repayment deadline until you vacate the home. Plus, a HECM reverse mortgage is a non-recourse loan so only the property can be used as a source to repay the loan. A HELOC does not have these guaranteed safeguards.
Do you want your heirs to inherit your home? A HECM reverse mortgage is typically repaid through the sale of the home—so if you want to pass it on to your heirs, you’ll have to plan on alternative means for the loan to be repaid.
Are you receiving government benefits? Typically, receiving a HECM reverse mortgage credit line doesn’t affect Social Security or Medicare benefits, but may impact Medicaid or Supplemental Security Income (SSI). Talk to your financial advisor and appropriate government agencies about your specific situation.
Still have questions? Call 855-523-4326 and a Longbridge specialist can help you find answers.
1Line of credit option is only available for adjustable rate HECM products.
2If part of your loan is held in a line of credit you can draw from, the unused portion will grow each month, at a rate that’s equal to the sum of the interest rate plus the annual mortgage insurance premium rate.
