Reverse Mortgage for Refinance

HELOC vs. HECM line of credit.

In retirement, it may be prudent to ensure that home equity is readily available as cash to satisfy unexpected (or planned) purchases or short shortfalls in cash. Two common home-equity release products available today for senior homeowners are the traditional Home Equity Line of Credit (HELOC) and the Home Equity Conversion Mortgage (or HECM, commonly known as a reverse mortgage)—line of credit. Both products are home loans that allows the borrower to access a portion of the equity in their home as needed, without
selling the home. However, the HECM line of credit, which is specifically designed for homeowners 62 and over, has some distinct advantages, including:
• Greater repayment flexibility.

With a HECM line of credit, the borrower can significantly increase their cash flow—not only by drawing proceeds from the line—but also from the flexible options they have to repay the borrowed money. The borrower can repay as much or as little toward the loan balance each month as they want, or they can choose to make no monthly mortgage payment at all. Of course, they still must maintain the home and pay property taxes and homeowners insurance.The loan doesn’t have to be repaid until the last remaining borrower moves out or passes away and is typically satisfied through the sale of the home. If their heirs want to purchase the home, they can by paying 95% of the appraised value or paying off the loan balance, whichever is less. They can also choose to refinance the home into their name or simply walk away (in which case the home is usually sold on the open market).

With a HELOC, the borrower is typically required to make interest-only payments for a set number of years (e.g., 10 years), which can diminish their cash flow. Then the HELOC transitions into the repayment period for a set number of years (e.g., 20 years), during which both principal and interest payments are required. This can result in the borrower experiencing payment shock, as payments can be significantly higher during the repayment period, which can further restrict cash flow for the duration of retirement.

• The unused portion of the borrower’s credit line grows over time.

With a HECM line of credit, if the borrower does not fully draw the HECM loan, the unused portion of the credit line grows at the same compounding rate as the loan balance (independent of swings in the value of the home)—giving them access to more funds over time. For this reason, it can be valuable to establish the HECM line of credit sooner rather than later. Here’s an example of how an unused HECM line of credit grows over time versus a loan balance in which no voluntary prepayments are made.
∞ Home value: $600,000
∞ Age: 70
∞ Expected Interest Rate: 4.00%
∞ Initial Principal Limit: $313,200
∞ Initial loan balance: $68,000 including payoffs and closing costs
∞ Initial Line of Credit: $245,200

This information is provided as a guideline and does not reflect the final outcome for any particular homebuyer or property. The actual reverse mortgage available funds are based on current interest rates, current charges associated with loan, borrower date of birth (or non-borrowing spouse, if applicable), the property sales price and standard closing cost. Interest rates and loan fees are subject to change without notice. Following the closing of the home purchase, no further principal or interest payments will be required as long as one borrower occupies the home as their primary residence and adheres to all HUD guidelines of loan. Borrower must remain current on property taxes, homeowner’s insurance (and homeowner association dues, if applicable), and home must be maintained.

With a HELOC, the unused portion of the line of credit does not grow over time.
• There isn’t a tight, preset window of time to draw funds within.

With a HECM line of credit, as long as the borrower meets the loan terms, they can always draw available funds from the line, pay them down, then use the funds again—or let them grow again.

With a HELOC, while the credit line is similarly reusable upon repayment, there is typically a 5- to 10-year period, known as the draw period, which is the only window of time when the borrower is permitted to withdraw available funds.
• The borrower can never owe more than the home is worth.*

A HECM line of credit is a non-recourse loan insured by Federal Housing Administration (FHA). That means even if the loan balance exceeds what the home is worth when the loan is due, the sale of the home will always satisfy the loan and the borrower and their heirs will not be responsible for paying the difference.
(Note: The borrower, or their heirs, keep the remaining proceeds [if any] after the loan is paid off.)

A HELOC is not a non-recourse loan and offers no such protections.
• The borrower’s credit line cannot be frozen, reduced, or canceled.
With a HECM line of credit, as long as the borrower meets the loan terms, no one—including the lender—can freeze, reduce, or cancel their line of credit, even if their financial situation suddenly changes or their home drops in value. A HELOC offers no such protections.

At Fairway Independent Mortgage Corporation, we are committed to educating financial professionals on what a HECM line of credit is and how it works. When used as part of comprehensive financial plan, a HECM line of credit offers older-adult homeowners some unique benefits that can often better suit their needs compared to other available options. When older-adult homeowners have more levers to pull when managing their cash flow needs, it may help them to extend the life of the productive assets they have under
management with a financial professional.**

*There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
**This advertisement does not constitute tax and/or financial advice from Fairway.