HECM LOC vs HELOC

When homeowners consider tapping the equity in their home, they typically think about refinancing their current mortgage in a cash out refinance, or a traditional home equity line of credit, (HELOC). However, if one of the homeowners is 62 or older, there is a third option that needs to be considered – the FHA insured Home Equity Conversion Mortgage (HECM).
HECM LOC vs HELOC

In this post, I am going to focus on comparing a HELOC and the HECM (Line of Credit). However, before I get into the details of the comparison, I do need to make sure that we all understand how each of these loans work.

HELOC

Since I am an expert on HECM’s, but not on HELOC’s I wanted to go to a trusted source. This is how a HELOC is defined at https://www.investopedia.com/mortgage/heloc/:

Home equity loans and HELOCs use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount. However, there’s a downside to using your home as collateral. Home equity lenders place a second lien on your home, giving them rights to your home along with the first mortgage lien if you fail to make payments. The more you borrow against your house or condo, the more you’re putting yourself at risk.

HECM

A Home Equity Conversion Mortgage (HECM), is an FHA insured loan specifically designed for homeowner’s age 62 and above, that allows them to convert a portion of the value of their home into money, without having to sell their home, give up title or obligate themselves to a monthly mortgage payment. However, since the home stays in the homeowner’s name, it is still the homeowners’ responsibility to make sure the property charges (property taxes, homeowners insurance, HOA fees, etc…) are paid on time.

The HECM offers flexible ways to withdrawal the funds:

  • Lump sum (with some restrictions from FHA during the first 12 months of the loan)
  • Line of credit (LOC)
  • Monthly payment options
  • Any combination of the above (for example, establishing a LOC while receiving a monthly payment)

Since the focus of this article on comparing the standard HELOC to the HECM LOC, that is the option that I will be discussing here today.

It should also be noted that in order to get a HECM LOC, the homeowner must have enough equity. There are no HECM 2nd mortgages. Any existing loan on the home must be paid in full, from the proceeds of the HECM loan. After this loan is paid off, any amount left over, can be placed into the HECM LOC allowing the homeowner to draw from it any time in the future.

If there is not enough equity to pay off the existing loan, the homeowner will ether have to pay the difference, or not get the HECM. In this case, if the homeowner brings the cash to closing to pay the difference, all of the proceeds from the HECM are being used towards paying off the loan, so there are no funds left over to establish a HECM LOC. The main benefit for someone doing this is to eliminate the principal and interest portion of their mortgage payment.

HECM LOC & HELOC Similarities:

The HECM and the HELOC are different ways to achieve the same result: converting equity in your home into cash that you can spend. Although they go about achieving this goal in very different ways, I first want to touch on the ways they are the same.

  1. Both loans convert home equity into easily accessible funds that can be used as needed.
  2. The homeowner is only charged interest on funds that are actually withdrawn.
  3. The interest charged is adjustable based on a variable rate tied to an index. HELOC’s typically use the Wall Street Journal Prime Rate and HEMC’s use the One-Year US Treasury Index.
  4. The home stays in the homeowners’ name on both loan programs

HECM LOC & HELOC Differences:

Both programs have positive and negative features about them. I want to make it clear that while I have recommended people to get a HELOC over a HECM in the past, as much as I try to be a neutral party in this article, I have been a reverse mortgage professional for almost 20 years. I am sure that I am biased towards the HECM program, even if I am not consciously aware of it.

HELOC Positives

a. Very low upfront costs.

b. Can maintain a zero balance and have no payments.

c. Interest only payments on balance used.

d. Can be used as a second mortgage (no not need to payoff the first mortgage).

HELOC Negatives

a. Limited accessibility of draw period (typically 10, but sometimes 20 year draw periods).

b. Payments can increase with increases in loan balance and interest rate.

c. Payment will increase to interest and principal when the draw period ends.

d. Homeowners must requalify to extend the draw period.

e. The initial LOC amount remains fixed (cannot increase without requalifying).

f. LOC can be reduced or closed out by the lender if the value of the home decreases.

HECM LOC Positives

a. No required monthly payment no matter how large the balance owed grows. However, the homeowner can make payments to reduce the balance if they choose. Any funds paid into the loan balance are placed into the LOC for future use.

b. Flexible pay out allows the homeowners to take unused funds in multiple ways. Can set up a monthly payment in the future where the lender deposits funds into the homeowners bank on a regular basis.

c. Unused funds in the LOC grow over time giving the borrowers access to additional equity in the future without having to requalify to increase the LOC.

d. LOC can never be reduced or closed out as long as the homeowners continue to meet their loan obligations. *

e. HECM loans are 100% non-recourse. The homeowners, the estate or the heirs, can never be held liable for any monies owed beyond the value of the home.

f. Federal Housing Administration (FHA) insured loan. **

HECM LOC Negatives

a. Higher closing costs. This is mainly due to the fact that it is an FHA loan which requires an Initial Mortgage Insurance Premium (IMIP) charge of 2.0% of the value of the home.

b. Ongoing mortgage insurance premium (MIP) of 0.5% of the loan balance. This charge does not have to be paid out by the homeowner, however it is charged, and added to the balance on a monthly basis.

c. Negative amortization. Since no payment is required on HECM loans, but the interest and mortgage insurance are still charged, these charges are added to the loan balance, and they increase the amount owned at the end of the loan.

Below is a simple chart to compare the differences. It is not as complete as what I have above, but it is still a good guide:

HECM LOC vs HELOC Comparison Table

Please feel free to contact me with any questions about this article or any other questions about reverse mortgages.

Bruce E. Simmons, CRMP
Reverse Mortgage Manager
American Liberty Mortgage, Inc.
1932 W 33rd Ave
Denver, CO 80211
Office: (303) 458-3778
Cell: (303) 513-2748 E-mail: bruce@almortgageinc.com Web-Site: www.reversemortgageradio.net
NMLS: 409914

*In order to keep the HECM LOC in place, the homeowner must meet their continuing obligation which include living in the home as their primary residence, paying property taxes, homeowners insurance, HOA dues and any other standard obligations in their city county and state.

**This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.

Bruce Simmons

Bruce Simmons

I absolutely love what I do - working with senior homeowners to help them live a more comfortable, flexible and secure retirement. I have the absolute best customers in the world, and even though I worked in the forward mortgage business for a number of years, I could never go back to doing conventional loans. I'm a 100% reverse mortgage specialist.

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Bruce is one of the most professional, knowledgeable and efficient experts I have worked ŵith ever in any field. He is fast to answer and always ready to help...and he's a great guy!

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!

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Tim Mallory
November 11, 2022

Bruce is one of the most professional, knowledgeable and efficient experts I have worked ŵith ever in any field. He is fast to answer and always ready to help...and he's a great guy!

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Kathleen Mitchell
September 18, 2022

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

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Mike Hoeffner
August 30, 2022

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

google
Jonathan Maiolatesi
August 22, 2022

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

google
Ronda Giblin
August 20, 2022

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

google
John Bell
August 20, 2022

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

google
Mary Bernard
August 19, 2022

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

google
LESLIE HINES
August 19, 2022

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!