Reverse Mortgage vs HELOC

Which one should I get—HECM reverse mortgage or HELOC?

— John
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The experts 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. The best loan 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 CREDIT VERSUS HOME EQUITY LINE OF CREDIT

HECM Reverse Mortgage LOC HELOC
Payments No monthly mortgage payments required.1 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).1 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.1 Must qualify based on credit score and income.
Options for Receiving Funds
  • Monthly payment
  • Line of credit
  • Lump sum
  • A blend of monthly payments and line of credit
  • Money disbursed as revolving credit as needed during the draw period
Credit Requirements
  • No debt-to-income ratio requirements
  • Prove ongoing expenses can be paid
  • Minimum credit score of 620 typically required
Annual Fees No fees to keep the loan open Annual fee to keep the loan open

1 Borrower must continue to pay property taxes, insurance, and maintenance.

2 If 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.

 


HECM vs. HELOC – Key Factors to Consider.

Before deciding between a HECM reverse mortgage line of credit and a home equity line of credit (HELOC), 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 payment1. 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 credit 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 as 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 payments1, 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.  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, a HECM reverse mortgage 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.