When borrowers hear the definition of a Home Equity Conversion Mortgage Line of Credit (HECM LOC), also known as a reverse mortgage equity line of credit, they are sometimes unsure how it differs from a traditional Home Equity Line of Credit (HELOC). The structures of both loans seem similar. Both are lines of credit secured against your home. Both accrue interest on only the amount that is borrowed. Both rates are usually variable.
However, there are distinct differences that make a reverse mortgage line of credit stand out. Although the better loan for you will depend on the details of your particular situation, the reverse mortgage line of credit has a few clear-cut advantages over the Home Equity Line of Credit if you are a senior. To help you fully understand the difference between the two lines of credit (HECM vs HELOC), we’ve created a comparison chart below for quick reference along with more in-depth answers to the questions we’re asked the most.
|Payments||No monthly mortgage payments from you. *||Principal and interest must typically be paid monthly.|
|LOC Growth||LOC allows unused line of credit to grow at the same rate the borrower is paying on the used credit, thus the line of credit amount grows.||Does not grow. What you signed up for will remain the same.|
|Reliability||Good. LOC remains open as long as the borrower lives in the home and follows all loan terms.||LOC can usually be decreased or closed without warning to the borrower.|
|Due Date||Typically when the last borrower leaves the home, or does not pay taxes and insurance, or otherwise does not comply with loan terms.||Typlically due at the end of 10 years.|
|Pre-Payment Penalty||No penalty.||Usually has penalty.|
|Government Insured?||Yes, by the Federal Housing Administration (FHA).||Usually not insured by the FHA.|
|Annual Fee||No fee to keep the loan open.||Annual fee to keep the loan open.|
What is a HECM loan?
Insured by the Federal Housing Administration (FHA), HECM stands for Home Equity Conversion Mortgage. What are Home Equity Conversion Mortgages, you may wonder? An FHA HECM loan, also known as an FHA reverse mortgage, is a type of home loan where a borrower aged 62 or older can pull some of the equity from their home without paying a monthly mortgage payment or moving out of their home. The funds from this equity can be disbursed to the borrower in a few ways, including a HECM Line of Credit.
About a Home Equity Line of Credit or HELOC
A Home Equity Line of Credit is another form of credit where your home is the collateral. You may learn how to get a home equity line of credit by visiting your bank. From your bank you may then get approved for a certain amount based on the equity in your home. In addition, there is only a set time during which you may borrow. You may or may not be allowed to renew after this allowed borrowing time frame. More than likely, you will repay in a monthly minimum payment that encompasses the interest combined with a part of the principal amount.
Is a HELOC a second mortgage? Not necessarily. Many HELOCs are an open line of available credit, but a second mortgage is usually an outright loan of a fixed amount rather than just an available home line of credit. Second mortgages are characterized by a fixed amount of money lent with that amount having to be repaid in equal payments over a fixed period.
The defining advantage of a HECM over a HELOC, and the characteristic that ends up winning over most seniors, is the fact that the HECM does not require you to pay monthly payments to the lender. You may draw on your credit line as needed without making a monthly payment. With the HECM Line of Credit, re-payment is only required after the last borrower leaves the home, as long as the borrower complies with all loan terms such as continuing to pay taxes and insurance. The HELOC, on the other hand, requires a monthly payment immediately.
Another one of the reverse mortgage benefits over the HELOC is the reliability that the HECM line of credit will stay open and available when needed. HELOCs are notorious for suddenly being decreased or being closed altogether, especially if the borrower has not been actively drawing from the loan. This is difficult because many borrowers prefer to have a line of credit available and open to withdraw from only if the time comes when a need arises. To be forced to stay actively borrowing on the credit line in order to keep an open status or finding out the line of credit has been decreased or closed suddenly would be frustratingly inconvenient for anyone.
The HECM LOC also has an advantage of significant line of credit growth potential. Taking out a HECM early in retirement and keeping the credit line open for use in the future proves to be a popular strategic plan. The unused line of credit grows at current expected interest rates; therefore, taking a HECM at 62 gives your line of credit time to grow as opposed to waiting until 82, especially if the expected reverse mortgage interest rates increase over time.
These are just a few of the major advantages of the HECM Line of Credit versus a HELOC. Call 800-AAG-0103 to speak with your reverse mortgage professional at American Advisors Group to discuss your situation.
“HECM vs. HELOC.” ReverseMortgage.net. N.P. N.D. Web. 19 Aug 2014. http://www.reversemortgage.net/hecm-versus-heloc/
“Home Equity Line of Credit versus HECM Line of Credit.” ReverseMortgageProsperity.com. Reverse Mortgage Prosperity. N.D. Web. 20 Aug 2014. http://reversemortgageprosperity.com/home-equity-line-of-credit-versus-hecm-line-of-credit/
“Title Bout.” mlsreversemortgage.com. MLS Mortgage Reverse Mortgage Advisors. 16 July 2014. Web. 19 August 2014. http://www.mlsreversemortgage.com/news/title-bout-hecm-vs-heloc/