Use a HELOC to Step Into a Reverse Mortgage
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Reverse mortgages are financial tools specifically designed to help seniors tap their home equity for retirement income. But they have two big drawbacks: 1) fees and expenses in relation to loan amounts are very high and, 2) they are aged-based loans meaning that the younger the borrower, the smaller the loan amount available.
You need to be at least 62 to qualify for a reverse mortgage. But, while there are no hard and fast rules, the “best” age for reverse mortgage borrowers is about 75. This is an age at which you can qualify for a decent loan amount and still have enough years to left smooth out the impact of high origination fees.
One option for retirees is to consider using a HELOC as a “bridge” to a reverse mortgage. For example, a 70-year old who owns his home outright could take out a HELOC requiring interest-only payments for 5 years. He then draws $500 per month for living expenses plus enough to pay the loan interest. Here’s what such a loan might look like after five years (assuming 7% average interest):
| Year | Draws to Supplement Living Expenses | Draws to cover HELOC Interest | Total Draws | Home Appreciation @ 4% |
| 1 | $6,000 | $238 | $6,238 | $250,000 |
| 2 | 6,000 | 721 | 6,721 | 260,000 |
| 3 | 6,000 | 1,277 | 7,277 | 270,400 |
| 4 | 6,000 | 1,915 | 7,915 | 281,216 |
| 5 | 6,000 | 2,649 | 8,649 | 292,465 |
| $30,000 | $6,800 | $36,800 |
At age 75, the homeowner seeks a reverse mortgage that will pay him monthly income for the rest of his life. According to the reverse mortage calculator at Financial Freedom, this senior could qualify for a HUD Home Equity Conversion Mortage that would pay him $570/month (after retiring the $36,800 HELOC balance) until he sold the home or died.
The main drawback for seniors of using a HELOC to tap home equity is that monthly payments are required. But for shorter periods (e.g. under seven years), this problem can be avoided by 1) finding a hELOC requiring the lowest possible interest-only payments and, 2) drawing on the home equity line of credit itself to fund the monthly payments
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