HECM vs. HELOC – What is Best for Me?

Many senior homeowners may take advantage of the equity in their home through a variety of options. Two of the options are the Home Equity Conversion Mortgage (HECM) loan and the Home Equity Line of Credit (HELOC). Both of these options have different requirements and qualities which make them valuable financial tools for the borrower.

Both HECMs and HELOCs require the borrower to repay the loan and follow through with specific responsibilities of the loan, including continuing to pay for all required taxes and insurance and maintaining satisfactory condition of the home and property.

Home Equity Conversion Mortgages

Homeowners who are 62 years of age or older and have sufficient equity in their home may qualify for a HECM loan. Any existing mortgage is paid off using the proceeds from the reverse mortgage loan. Therefore, homeowners will not have to make monthly mortgage payments. Typically the loan becomes due when you sell your home, move out of the home as your primary residence or pass away.

Failure to meet loan obligations may also cause the loan to become due and payable. The amount of money you can receive from a HECM loan depends on the borrowers’ ages, interest rates, equity in the home, and the lesser of the home’s appraised value, sale price or maximum lending limit.

HECM loans are insured by the Federal Housing Administration (FHA). This insures that borrowers will continue to receive their loan proceeds even in the event that the lender becomes insolvent. Borrowers are also assured that neither they nor their heirs will ever owe more than the home’s value provided the home is sold to repay the loan.

Borrowers are also required to complete counseling from a Department of Housing and Urban Development (HUD) approved agency. Professional counselors will go over the specifics of a HECM reverse mortgage loan with the borrower and can answer any questions.
Borrowers have the option of how they will receive their funds from the loan. The fixed rate HECM loan program allows borrowers to receive their loan proceeds as a lump sum. The adjustable rate HECM loan allows borrowers to receive funds monthly as a term or tenure payment, a line of credit, a lump sum or a combination of these disbursement options.

Home Equity Line of Credit

To meet the requirements of a HELOC, borrowers have to meet specific credit and income qualifications and the loan must be repaid in monthly payments. Borrowers may withdraw funds during the draw period.

Like HECMs, borrowers may obtain either a fixed rate or an adjustable rate HELOC, however this is dependent upon the lender and these loans are often attached to a prime rate plus a margin.