HECM vs HELOC
Before you consider a HELOC, there may be a better choice, exclusively for you. A Home Equity Conversion Mortgage.
- If you are 62 or older
- If you don’t want to make required monthly mortgage payments
- If you are planning on living in the home for at least several years
- If you are interested in a flexible line of credit that is available when you need it
For many people, a Home Equity Conversion Mortgage (HECM) — often referred to as a reverse mortgage — has clear-cut advantages over a home equity line of credit (HELOC):
No Monthly Repayments
The reverse mortgage requires no monthly mortgage payments, and borrowers have the option to prepay at any time without a penalty. By contrast, borrowers with a HELOC must pay back any money borrowed, plus interest, within the repayment period—requiring monthly payments that can grow over time. Some HELOCs even have prepayment penalties. With the HECM, the loan plus interest is paid back only when the borrower stops living in the home, sells, or does not meet terms of the loan.
No Annual Fee
The reverse mortgage requires no annual fee to maintain the line and no termination fee. With a HELOC there can be an annual fee and a termination fee that can be hundreds of dollars over the life of the loan.
A Line of Credit That Grows
The unused portion of the HECM credit line grows over time, will stay open and available when needed and cannot be canceled or reduced, as long as you meet the terms of the loan.1 With a HELOC the lender can reduce or cancel the line of credit at any time. Lenders often reduce or cancel HELOCs if home values fall, if there is a recession, or if the HELOC is unused, even if the borrower makes all the payments. Taking out a HELOC is not always the most reliable option.
Flexibility
With a reverse mortgage you have the option to receive the proceeds from the HECM as a line of credit, regular monthly payments, a lump sum, or any combination of these choices.
FHA Insurance
HECM reverse mortgages require a mortgage insurance premium (MIP) to be insured by the Federal Housing Administration (FHA). Because of this insurance, these loans are “non-recourse,” which means when your home is sold to repay the loan, neither you nor your heirs will be required to repay more than the sale price of the home, no matter how long you live in the home.
