In a previous post we noted an important fact largely ignored in the plethora of recent books and articles on reverse mortgages: the majority of reverse mortgages (at least HECM reverse mortgages) terminate within seven years of their origination. For many of these borrowers, a standard home equity line of credit loan (HELOC) might have been a more efficient borrowing tool.

Of course no one can predict the future and we suspect many HECM borrowers entered into their loans with thoughts of staying put for ten years or more. But, as noted, data from actual HECM loans reveals that fewer than 50% of HECMs last beyond seven years. For shorter periods such as these, the HELOC option is certainly worth investigating.

How does someone decide which is better for them - HECM reverse mortgage or HELOC? Let’s start by reviewing the the main points that differentiate the two types of home equity borrowing:

HECM vs HELOC

1. Amount You Can Borrow
HELOC loans are not age-based and typically allow the homeowner to borrow 70% - 100% of available equity depending on household income, credit scores and similar factors. The amount you can borrow with a HECM loan is determined in large part by the age of the homeowner(s) with older homeowners eligible to borrow more. A HECM reverse mortgages generally will range between 40%-80% of available home equity. Advantage: HELOC

2. Closing Costs
Closing costs on a HELOC loan are quite reasonable, typically ranging between $400 - $1,500. Some lenders even offer zero closing costs. HECM closing costs, on the other hand, are quite steep largely because of the FHA insurance premiums charged to cover the risk of the loan balance growing in larger than the home’s equity over time. Expect to pay $10,000 - $20,000 in HECM closing costs, depending on the size of the loan. Advantage: HELOC

3. Term of Loan
A HECM reverse mortgage has no set “due date”. The loan is payable only when the homeowner dies, sells, or permanently moves out. HELOC loans typically are due at the end of ten years, after which the loan needs to be repaid or refinanced. Advantage: HECM

4. Required Loan Payments
The main selling point of HECM reverse mortgages is that no loan payments are required until the loan terminates - i.e. the homeowner sells, moves, or dies. Standard HELOC loans, on the other hand, minimally require payment each month of the interest accrued on the loan balance during the prior month. As the HELOC loan balance grows, the required monthly interest payments grow. Advantage: HECM

5. Qualifying
Because HELOC’s require monthly payments, lenders are concerned about the borrowers ability to pay as gauged by credit scores, household income, savings, etc. It is entirely possible that a retired senior homeowner on limited income can be turned down for a HELOC. HECM borrowing criteria are focused on two major factors: age of borrower and the amount of available home equity. Financial wherewithal and credit scores are not a consideration, though if money is owed to the federal government, it can be an issue. Advantage: HECM

6. Interest

Both HELOC and HECM loans are “adjustable rate” loans meaning the interest rate changes (up or down) at specified intervals. The most popular type of HECM loan is the monthly adjusting option while the most popular type of HELOC adjusts rates quarterly.

The interest rate on a HECM loan is capped whereas interest rates on HELOCs generally are not capped. The lifetime “cap” for a monthly HECM is 10%, so a 6.5% original rate could rise to 16.5% before being capped.

Both HELOC and HECM interest rates are determined by adding or subtracting a “margin” to a specified index rate such as the “1-year US Treasury Constant Maturity”, “prime rate” or the “London Interbank Offering Rate (LIBOR)”. With HECM reverse mortgages, there is limited rate competition - lenders apply the same margins to the same indexes (although there now is more variety in margins). There is strong rate competition in the HELOC market among lenders.

Historically, average interest rates on HECMs have tended to be lower than rates on HELOC’s

Interest paid on a HELOC is tax deductible which can substantially reduce the effect rate paid. HECM interest is deductible in the year it is paid (i.e. at loan termination) which may be of limited value.

Slight Advantage: HECM

7. Unused Line of Credit
With both HELOC and HECM loans, interest accrues only on amounts actually drawn down (borrowed). Since most HECM borrowers finance loan closing costs, they carry a substantial loan balance from outset that accrues interest. However, the unused portion of a HECM line of credit has a unique feature: it actually grows at the same basic rate as the borrower is paying on the used loan balance. In other words, the unused line of credit grows much like a savings account, giving the homeowner greater future borrowing capacity. HELOC loans do not have this feature. Advantage: HECM

Additionally, here’s a more detailed comparison of HECM and HELOC loans.

When all is said and done, the key factor to consider in weighing the HECM vs HELOC loan decision is “how long will the homeowner be able (or desire) to remain in the home?” As a general rule, the longer the period, the more advantageous a HECM looks; the shorter the period, a HELOC may be the better option.

With these facts in mind, we developed the HECM or HELOC Calculator that provides users with side-by-side comparisons of the HELOC and HECM options. Using the calculator will require you to obtain information from an online reverse mortgage calculator. We’ve provided step-by-step guidance to assist.

Please contact us if you have questions or idea on how to make the calculator better.

Social tagging: HECM > hecm calculator > HECM vs HELOC > heloc > home equity calculator > Reverse Mortgage Calculator

A Few More Related Articles of Interest:

Use a HELOC to Step Into a Reverse Mortgage

Reason 1: HELOC’s Require a Monthly Payment; Reverse Mortgages Don’t

HELOC vs HECM Comparison

When a HELOC is the Better Choice

Reasons Why a HELOC Isn’t the Answer to High Reverse Mortgage Costs