A Home Equity Line of Credit is a revolving loan that is secured by the value of your home with spending limitations similar to that of a credit card. You may not exceed the maximum credit limit and, similar to a traditional mortgage, you will make monthly payments for a fixed term.
Unlike a Home Equity Line of Credit (HELOC), the HECM does not require the borrower to make monthly mortgage payments and any existing mortgage or mandatory obligations can be paid off using the proceeds from the reverse mortgage loan. Many seniors use the remaining proceeds to fund medical expenses, make home repairs or just keep the extra cash in case of an emergency.
With the HECM, repayment is not due as long as you live in the home as your primary residence, continue to pay required property taxes and homeowners insurance, and maintain the home according to FHA requirements. Provided the home is sold to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt. Your heirs will receive any remaining equity after paying off the reverse mortgage.
A HELOC’s interest rates are usually higher than a first mortgage loan and require monthly loan payments. A HELOC will also generally require you to maintain a certain level of equity in your home or the HELOC may be closed. And with the recent tightening of the financial market, many lenders have discontinued or significantly revised their HELOC programs, making access more difficult. With the HECM, homeowners have an alternative to the HELOC.
Benefits of a HELOC:
• Lower interest rates in most cases
• Lower upfront costs
• May be more suitable for short term-needs
Benefits of a HECM:
• May have more flexible qualification criteria
• Does not have to be paid off as long as all the loan obligations are met*
• Line of credit cannot be frozen due to changing market values*
• No monthly mortgage payments*
* The borrower must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.