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. Still, these options cannot be combined on a given home. Important differences must be considered between the two options.

* Proprietary reverse mortgage lines 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 HECM lines can be as large as $4 million dollars. Call us for details. 

HECM Line of Credit: A unique safety net offering a growth feature and flexible repayment
With its flexible payment options, a HECM can give eligible clients more financial control and can help you design more solutions for your clients. It can serve as an excellent risk management tool that can help keep productive assets under your management and help their portfolios last longer.

How can a reverse mortgage be a tool for retirement?
“A fiduciary planner has to look out for the best interests of their clients. As a side effect, the best interests of the planner can be served through research that shows how the legacy value of assets can be improved by a reverse mortgage.”  —Wade D. Pfau, Ph.D., CFA, Professor of Retirement Income, The American College

Both a standard home equity line of credit (HELOC) and a home equity conversion mortgage line of credit (HECM) can be used to supplement retirement savings. However, these options cannot be combined on a single property. There are crucial differences 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.  

Lenders can cancel, freeze, or lower your HELOC at any time. During the financial crisis of 2008, HELOCs were responsible for a significant number of homeowners who were forced into foreclosure. 

With a HECM, the line cannot be canceled, 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 decides how and when the HECM is used, has flexible control over payback, and the HECM grows over time independent of the home's value.

If your goal is to set up a liquid contingency fund, you must examine the crucial differences between HECM’s and HELOC’s. Call me to discuss these differences in depth for you or your clients.
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A growing number of retirement researchers, such as Harold Evensky, John Salter, and Wade Pfau, have carried out a significant amount of research to evaluate the benefits and drawbacks of a reverse mortgage. In addition to the potential uses for it and the value it adds to the retirement income distribution planning.  All of these highly respected researchers have reached the same conclusion, which is that the reverse mortgage credit line provides particular value as a tool that can increase the likelihood of successful client outcomes and legacy value.
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Wade Pfau states, “The line of credit provides a way to create a more efficient retirement income strategy while also serving as a hedge if the client’s home value were to fall. It is essentially a put option on the value of the home.”​

How does the HECM Loan process work?
We offer FHA-insured HECMs, a safe, secure loan that lets you access your home’s equity to get cash for your retirement funding needs. We also provide safe Jumbo-Reverse loans from $500,000 to $6 million. (Finally, we have LESS plans from $25,000 to $500,000 that have no age requirements and can use your primary residence, a vacation home, or residential investment property as collateral. Click on here to learn more about how these work.)
 
The amount you receive is determined by the current interest rates, the age of the youngest borrower, the lesser of the appraised value of your home, the sale price, or the maximum lending limit, and any other factors that may be relevant.

Due to the terms of the HECM, there is a possibility that the funds you have access to may be limited during the first year after the loan closes. In general, the older you are, the more equity you have in your home, and the lower your mortgage loan balance, the more money you can expect from a HECM loan.
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Receiving Your Money
The HECM is available as either an adjustable or fixed-rate loan. With the adjustable rate, the rate is adjusted monthly based on the CMT. The fixed-rate HECM maintains the same interest rate over the life of the loan. You may need to reserve more cash from the loan's proceeds to pay for taxes and insurance.
 
Repaying the Loan
Loan repayment is not due as long as you meet the loan obligations. 

• Living in the home as your primary residence, 
• Continuing to pay required ​property taxes and insurance, 
• Maintaining the home according to FHA requirements. 

When it comes time to repay the loan, neither you nor your heirs will be obliged to pay more than the home's current market value. Even if the outstanding balance on your mortgage is more than the home's value, the loan will be paid off as long as you or your heirs decide to sell the home. Best of all, any remaining equity goes to you or your heirs once the loan is repaid.

Not everyone is eligible for a reverse mortgage. Along with age, there are a few other requirements for taking out a reverse mortgage loan.

• Your home must be your principal residence, meaning it must be where you spend the majority of the year 
• You must either own your home outright or have a low mortgage balance. Owning your home outright means you do not have a mortgage on it anymore.  If you have a mortgage balance, you must be able to pay it off when you close on the reverse mortgage. You can use your own funds or money from the reverse mortgage to pay off your existing mortgage balance  
• You may not be delinquent on any federal debt, such as federal income taxes or federal student loans.  You may, however, use funds from the reverse mortgage to pay off this debt 
• You may be required to set aside a portion of the reverse mortgage funds at your loan closing or have enough of your own money to pay ongoing property charges, including taxes and insurance, as well as maintenance and repair costs
• Your home has to be in good shape. If your house does not meet the required property standards, the lender will tell you what repairs need to be made before you can get a reverse mortgage loan
• You must receive counseling from a HUD-approved reverse mortgage counseling agency  to discuss your eligibility, the financial implications of the loan, and other alternatives

Give us a call or fill out a request to see if you qualify for a Hecm. 
​For eligibility considerations, see our In-Depth Information. 

Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs), which are federally insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA). 

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