HECM Vs. HELOC in Retirement Planning

Both a traditional home equity line of credit (HELOC) and a home equity conversion mortgage line of credit (HECM) can serve as a source for contingency funds in retirement, but they cannot be combined on a given home. Important differences must be considered between the two options.

* Proprietary reverse lines of mortgage are also available as an alternative to a HELOC.  Like all reverse mortgage products, payments are optional.  Depending upon the age of the borrower and the value of property, these lines can be as large as $4 million dollars and are much easier to qualify for than any HELOC. Call us for details. 

Both a traditional home equity line of credit (HELOC) and a home equity conversion mortgage line of credit (HECM) can serve as a source for contingency funds in retirement, but they cannot be combined on a given home. Important differences must be considered between the two options.

With a HELOC, repayments are required sooner. Users of the HECM can voluntarily repay sooner but are under no obligation to do so while living in the home.

In addition, retirees may not qualify for a HELOC if they do not have regular and sufficient income or excellent credit. The income and credit qualification requirements for a HECM are less stringent than with a HELOC.  

A HELOC line of credit can be cancelled frozen or reduced. This was a huge problem with HELOC’s during the 2008 financial crises. Forcing many homeowners into foreclosure.  With a HECM, the line cannot be cancelled, frozen or reduced.

The borrowers are protected from lenders modifying their obligations to lend remaining funds in the line of credit for any reason with a HECM. No such protections are available with HELOC’s.

In addition, the principal limit of the HECM will grow throughout retirement, unlike the fixed amount available with a HELOC.

In contrast to a HELOC, the HECM is non-cancellable, the borrower controls how and when it is used, it has flexible payback control, and the HECM grows over time independent of home value.

If your goal is to set up a liquid contingency fund, you must examine the important differences between HECM’s and HELOC’s. Call me to discuss these differences in more depth for you or your clients.
​
For eligibility considerations, see our in-depth information.

To find out how much you will be eligible to receive on a HECM program, give us a call or simply request your Custom Rates


Reference: Reverse Mortgages by Wade Pfau, PH.D, CFA