There are times when a HELOC (or other traditional home equity loan) is preferable to a reverse mortgage for extracting home equity for retirement cashflow purposes:

1. When There is a Good Chance the Homeowner Will Not Stay in the Home for at Least 5 Years - Simply put, a reverse mortgage is a very expensive type of loan if the homeowner moves out or dies during the early years of the loan. If it is likely you will not be in your home for at least 5 years, you are better off borrowing via a home equity line of credit (HELOC). With a HELOC there are typically small (even zero) closing costs to consider; the downside is that you must make a monthly payment to the lender. For the first 7-10 years of the loan, you will need to pay only interest on the amount you’ve actually borrowed. Another downside of a HELOC is that you will need to show the lender that you have the financial wherewithal to make the monthly payments. It is possible for a short period to make the monthly payments by drawing against the HELOC (i.e. borrowing more to make loan payments), but for longer periods this will not work.

2. When You Don’t Want Your Options Limited - Even if you don’t think you’ll be moving within 5 years, you may want to keep your options open. The decision to take out a reverse mortgage is also a decision to limit your options in couple of ways. First, as noted, you need to stay in the home long enough to spread the high closing costs out over time for the loan to be sensible. Second, depending on interest rates, home values and other factors, the rising debt of a HECM will eat into your home equity and limit future financial flexibility. The same factors are at work with a HELOC loan, but you have more flexibility to refinance - even into a reverse mortgage product - at a later date.

3. When You Are Too Young or Too Old - Age matters a lot in the reverse mortgage arena. Although HECMs are available to senior homeowners age 62 and older, the “best” age for reverse mortgage borrowers seems to be about 75. This is an age at which you can get a decent loan amount and still have enough years to left smooth out the impact of fees. The amount that can be borrowed is largely determined by actuarial life expectancy tables - the younger the borrower, the longer his or her life expectancy and the less the amount of the loan. Fees, however, generally are not age dependent. As examples, using the reverse mortgage calculator available at the NRMLA site, loans were computed for a sample $200,000 home for a single homeowner at three ages:

62-year old - Estimated fees are $14,782 or 14.7% of the computed loan principal amount (before fees) of $99,954. This homeowner could receive a monthly tenure payment of $494 as long as he stayed in the home.

75-year old - Estimated fees are $14,130 or 11.7% of the computed loan principal amount (before fees) of $120,842. This homeowner could receive a monthly tenure payment of $708 as long as he stayed in the home.

85-year old - Estimated fees are $13,100 or 9.5% of the computed loan principal amount (before fees) of $137,933. This homeowner could receive a monthly tenure payment of $1,078 as long as he stayed in the home.

Thus, the younger person suffers from both a relatively paltry available loan amount and because fees - as a percent of the loan amount - are inordinately high. The 85-year old seems to “win” on both these counts, but only because his life expectancy is relatively short. Moreover, there is a greater chance that an 85-year old will need to permanently leave the home on an unplanned basis for assisted living.

4. When There is a Big Age Difference Between Homeowners - The reverse mortgage calculations are always based on the age of the youngest homeowner. Thus, for a 75-year old homeower with a 62-year old spouse, the age used to calculate a HECM loan will be 62. Moreover, if the spouse is under age 62, the reverse mortgage option won’t even be available unless the home is re-titled in the older spouse’s name only.

5. When Tax Deductible Interest is an Important Consideration - Interest on a home equity conversion mortgage (HECM) is not deductible until paid - i.e. when the house is sold or the homeowner dies. Interest on a HELOC, however, is paid every month and - if you itemize deductions - is deductible in the year paid. Some seniors with taxable earnings or retirement income (IRA, 401k, etc.) may find it more advantageous to borrow through a HELOC rather than a HECM for this reason.

Social tagging: HECM vs HELOC

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

LOC - Line of Credit

HELOC vs HECM Comparison

Reverse Mortgage Options - A Lender Provides Some Direction