Benefits of a Reverse Mortgage Loan Compared to HELOC and Home Equity Loan
Reverse Mortgage in Hilton Head Island, SCFor homeowners aged 62 and above, a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, provides distinct benefits when compared to other home equity release options such as a Home Equity Line of Credit (HELOC) or a Home Equity Loan (HEL).
According to a survey by Clever, over half (51%) of retirees believe they might outlive their savings, and 65% of retirees report feeling financially insecure. This financial strain is compounded by rising costs of essentials such as food and gas, putting additional pressure on retirees’ budgets.
For many older homeowners, home equity makes up the largest portion of their wealth, often far surpassing other assets like retirement funds. Home equity, however, is not easily accessible unless the home is sold or the equity is utilized through a loan, as it is typically a non-liquid asset.
As retirees plan for the future, it may be wise to ensure that home equity can be converted into cash to cover unexpected expenses or planned financial needs. One solution is to tap into this equity without selling the home, by obtaining a loan against the value of the property.
The three most common types of home equity release loans for seniors are the Home Equity Line of Credit (HELOC), the Home Equity Loan (HEL), and the Home Equity Conversion Mortgage (HECM). All these options use the home as collateral, offering flexibility in how the funds can be spent, but each works differently and has unique implications for homeowners.
A HECM is specifically designed for homeowners aged 62+ and is tailored to meet the needs of seniors. Borrowers can choose to receive the loan proceeds in a lump sum (similar to a HEL), through a line of credit (similar to a HELOC), or as fixed monthly payments (like an annuity).
Key Advantages of HECM Over HELOC and HEL
Reverse Mortgage in Hilton Head Island, SCFlexible Repayment Options
A key benefit of a HECM is its flexible repayment structure. Borrowers have the option to repay the loan at their own pace — they can make monthly payments, repay sporadically, or opt to make no monthly payments at all. However, homeowners must still maintain the property and cover taxes and insurance.
The loan balance is only due when the last borrower either moves out or passes away. Heirs can repay the loan by paying 95% of the appraised home value or the outstanding loan balance, whichever is lower. Alternatively, heirs can refinance the property or sell the home.
HELOC: HELOCs allow for withdrawals as needed during a “draw period” (e.g., the first 10 years), but interest payments are typically required, which can burden seniors on a fixed income. After the draw period ends, borrowers must repay both principal and interest, which may result in significantly higher payments, impacting cash flow during retirement.
HEL: With a HEL, the borrower receives a lump sum at closing, and fixed monthly payments are required throughout the loan’s term, typically five to 20 years. Like with a HELOC, these required payments can strain a retiree’s cash flow.
Credit Line Growth
With a HECM line of credit, any unused funds grow over time at the same interest rate applied to the loan balance. This allows for increasing access to additional funds as time progresses, independent of changes in the home’s value. This feature makes it beneficial to establish a HECM credit line early.
In contrast, a HELOC’s unused credit does not grow over time.
No Strict Draw Period
A HECM provides flexibility in when and how often the borrower can access their credit line, as long as the loan terms are met. Borrowers can withdraw funds, repay them, and borrow again without restrictions.
With a HELOC, there is typically a set draw period (5 to 10 years), after which no further withdrawals are permitted, and repayment becomes the focus.
No Risk of Owing More Than the Home’s Value
A HECM is a non-recourse loan insured by the Federal Housing Administration (FHA). This means that even if the loan balance exceeds the home’s value at the time of repayment, the borrower or their heirs are not responsible for the difference. If the home’s value is greater than the loan balance, the borrower or their heirs retain any surplus after the loan is repaid.
HELOCs and HELs are typically not non-recourse loans and do not offer this type of protection.
Easier Qualification Process
HECMs generally have more lenient qualification requirements for seniors. While there is no minimum credit score requirement, lenders will assess the borrower’s financial situation to ensure they can meet the loan obligations, such as maintaining property-related taxes and insurance.
For HELOCs and HELs, a FICO score of 620 or higher is typically required, and borrowers must demonstrate the ability to make monthly payments.
Credit Line Stability
A HECM credit line cannot be frozen, reduced, or canceled, as long as the borrower meets the loan terms. This offers seniors protection from changes in financial circumstances or fluctuations in home values.
A HELOC, on the other hand, can be frozen, reduced, or canceled by the lender under certain conditions.
HECM Loans
If you’re interested in exploring whether a HECM loan is right for you or a loved one, contact Fairway Independent Mortgage Corporation today to learn more about how we can help.
Ready to unlock the financial potential of your home? Discover how a reverse mortgage can provide you with the financial flexibility and security you deserve in retirement. As a Reverse Mortgage Specialist in Hilton Head, I’m here to guide you every step of the way, ensuring you make informed decisions tailored to your unique needs.
Reverse Mortgage Specialist of Hilton Head
Hilton Head Island, SC 29926
(854) 842-2505
http://reversemortgagegreenvillesc.com/
Areas Served: Myrtle Beach, Little River, Surfside Beach, Forestbrook, Conway, Socastee, North Myrtle Beach, Carolina Forest, Columbia, Charleston, Greenville, Hilton Head
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