People often look at Home Equity Lines of Credit (HELOC) to give them extra cash. These can be a good option. However, for those 62 and older, a Home Equity Conversion Mortgage (HECM) Line of Credit may be more advantageous. Let’s compare the two.
|Home Equity Line of Credit (HELOC)||Home Equity Conversion Mortgage (HECM) Reverse Mortgage Line of Credit|
|Borrow against equity in home||Yes||Yes|
|Uses of funds||There may be stipulations that funds can only be used for certain things, i.e. remodel, adding an addition.||No restrictions.|
|Draw Period, time during which you can access funds/Repayment Period, time when you make payments to repay the loan||Draw Period is usually 5 to 10 years; when draw period ends you can no longer access funds.
Repayment period is usually 10 or 20 year terms; Some may require a payment of the full balance at one time at the end of the draw period.
|Longer term: Draw period is as long as the home is your primary residence and you abide by the terms of the loan and there are funds available in your line of credit.
Repayment is due when the home is no longer the primary residence, usually when borrower dies, sells or moves. Due date on mortgage document is 150th birthday of youngest borrower.
|Payment Requirement||Yes – requires a minimum monthly payment of interest during Draw Period; eventually increasing to include principal to pay entire loan balance during Repayment Period.||No – Offers flexible option; No monthly mortgage payment required but can choose to pay as little or as much as you want or NOT at all.|
|Responsible for Property Taxes, Insurance, maintaining property; paying HOA dues if applicable||Yes||Yes|
|Interest Rates||Most are Adjustable Rate; as interest rate rises payments will also rise.
Generally no cap on the size of the adjustments. Lifetime caps may be available for a shorter term HELOC. May vary by State law.
|Adjustable Rate. Interest added to loan balance, only impacting loan balance at end. (See Non-recourse Loan.)
Adjustable Rate Options have a lifetime cap on the rate; for the monthly adjustable rate it is10 points and for the annual rate it is 5 points over the initial rate at the time of closing.
Fixed rate option is available but does not offer Line of Credit option, all available funds must be drawn at closing.
|Called due or Freezing Funds||Banks can call the loan due or freeze funds not yet used or cut the Line of Credit if they find adverse information about the borrower’s credit or as the market changes as was done when home values declined.||Line of Credit cannot be frozen as long as you meet terms of the loan. Because FHA insures the loan it’s guaranteed to be there for you during term of the loan.|
|Line of Credit Growth Rate||No||Unused Line of Credit grows so more funds become available in future with Adjustable Rate Option.|
|Re-borrow LOC Funds||Yes||Yes; If loan payment(s) made, reduces loan balance and funds can be re-borrowed in future with Adjustable Rate option. Line of Credit is not available with the Fixed Rate Option so funds cannot be re-borrowed.|
|Non-recourse Loan – The loan can only be repaid with the value of the home. There is no personal liability to repay the loan from the borrower or their heirs.||No||Yes|
|Qualifying||Lenders look at income, credit worthiness including credit scores, and ability to make HELCO payments. Regulatory requirements and restrictions may prevent some seniors qualifying.||62 and older, meet Financial Assessment requirements demonstrating their ability and willingness to pay property taxes and insurance into the future. In some circumstances a Life Expectancy Set Aside may be required to cover the property taxes and insurance.|
|Planning for future||Short term loans limit use in future when one might need long-term care.||Longer term loan offers options for planning and potentially having funds for long-term care needs in the future.|
If you are looking for funds for a short period of time, you can afford to make payments and you qualify, a HELOC may be the best option for your situation.*
For those 62 and older, generally the HECM is more advantageous over a HELOC.
With the flexibility of making payments toward the loan balance, or NOT making a mortgage payment at all, the HECM reverse mortgage line of credit could be part of your plan for when life changes.
(Borrowers are still responsible for paying property taxes, hazard insurance and maintenance of the home.)
The HECM Line of Credit funds, which have a growth rate on unused funds, can provide some safeguards if one’s situation changes such as loss of job, Social Security or pension reduced because of the loss of a spouse, or changed or reduced of financial assets. Or if “life happens” with funds in a HECM line of credit you could cover your long-term care needs.
Additionally one can change their payment plan option to receive tenure or term monthly payments; this can benefit them as their needs change.
*If you do a HELOC then later decide to do a HECM, there is a 12 month seasoning requirement, have to wait 12 months, after taking out the HELOC and drawing $500 or more. Doing the HECM initially may make more sense.
For further details on the reverse mortgage contact us if you are in Minnesota. As your local broker, we work with several lenders and provide free information and facts with no obligation, meeting in person whenever possible. For other states, contact your local reverse mortgage specialist who is a broker, one who works with several lenders, has their Broker License/NMLS and preferably holds the Certified Reverse Mortgage Professional (CRMP) designation.
© 2017 Beth Paterson, CRMP, Beth’s Reverse Mortgage Blog, 651-762-9648
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