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HECM Reverse mortgage or HELOC – Which is the Best Cash Flow options for fixed-income seniors?

Today, in America, many seniors are living off a fixed income that barely covers their essential needs. Almost 20 percent of married retirees rely on social security for the bulk of their income. The same goes for nearly 50 percent of unmarried retirees.

Reverse Mortgage

Also, around ten to twelve thousand baby boomers are retiring every day, and the trend will continue into 2030. If this trend continues at this rate, retirement experts predict we are on the brink of a national emergency.

Several surveys have shown that a majority of seniors have chosen to remain in their homes and age in place. 

But, how will they accomplish this when most seniors exist on limited incomes and savings?

The answer could be in the utilization of accumulated home equity. Short of selling the home, their options are limited. Most seniors opt for one of the following:

  • They choose to borrow money through a traditional mortgage or a home equity line of credit (HELOC).
  • They decide to tap into their home equity through a reverse mortgage. The dominant reverse mortgage (95%+) nationally is the HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage.

The terms and provisions of the HECM reverse mortgage are uniquely designed to accommodate the needs and circumstances of retirees.

HECMs offer better advantages for seniors when compared to HELOCs. However, industry records show that HELOCs are chosen 9 out of 10 times over HECMs. The reasons are:

Lack of Knowledge

Most seniors who own a home are only familiar with and understand traditional mortgages. For these seniors, HELOCs had long been an easy way for them to tap home equity and typically require minimum payments of interest only. 

HECM reverse mortgages, on the other hand, are not well understood and are generally viewed in a negative or questionable light.

Misconceptions and Myths

Misunderstandings about reverse mortgages are prevalent and, unfortunately, serve to discourage examination at the outset.

Uninformed Advisors

Most seniors have established long and trusted relationships with their bank or other advisors. Typically, they’d look to these experts first for advice and recommendations. Banks, who promote their in-house HELOC program, don’t offer HECMs, because they are not well informed on reverse mortgage terms and benefits.

Comparing your HECM and HELOC options

Are monthly payments required?

For HECM, no monthly payment is required. HELOCs, on the other hand, monthly payments are required – usually interests only.

 Do I have to pay upfront costs?

For HECM, the closing cost will include a premium for FHA insurance based on the amount of the initial disbursement.

For HELOC, since FHA does not insure it, no upfront cost is needed. However, the upfront cost may vary by lender.

Is credit line growth guaranteed?

For HECM, the undrawn credit line balance grows at the same rate charged on the balance owed.

For HELOC, the credit line balance doesn’t grow, and access to funds stops at the end of the initial withdrawal term.

Is there a mandatory payoff date?

For HECM, no repayment is required as long as the borrower continues to live in the home, and the loan remains in good standing.

For HELOC, there is a mandatory payoff date. It is usually around 30 years or less.

Can the lender limit or freeze access to funds?

HECM lenders cannot freeze or limit access to funds. HELOC lenders can restrict access to funds to the initial draw-down period – usually the first 7 to 10 years.

Making an Important Decision between HECM Reverse mortgage and HELOC

Making the right choice between a HELOC and a HECM reverse mortgage requires an understanding of the senior’s individual needs and circumstances, as well as fulfilling their near and long-term objectives.

Frequently, people make conclusions without enough information or with advice from people who aren’t qualified.

The fact is, both programs have their place and—like most things in life—have pros and cons, costs, and responsibilities.

The new realization that home equity wealth can and should be a part of retirement planning is challenging the traditional way of thinking.

And for many seniors who own a home, the HECM program is a smart solution. However, reverse mortgages should always be evaluated alongside other options—including the sale of one’s home to downsize or relocate.Talk to our licensed experts at Reverse Mortgage Answer to learn more about these options.