The use of a reverse mortgage is not a one-size-fits-all approach to retirement, but certain products will help senior borrowers more than others, writes Jack Guttentag, a.k.a. The Mortgage Professor in a series of recent articles on reverse mortgages featured in Inman News. When comparing the loan with a Home Equity Line of Credit, however, there are some clear advantages the reverse mortgage presents that are not found in the HELOC, he writes.
Despite there being different uses for people looking to meet different needs in retirement, Guttentag hones in on the use of a reverse mortgage to supplement income pending the sale of a home. He writes:
Seniors planning to sell their house in a few years who need additional funds in the meantime can use a HECM or a home equity line of credit (HELOC). While HELOC borrowers must pay interest on the amounts they draw, over a short period they can increase their draw by enough to cover the interest so that the net cash withdrawal is comparable to the draw on a HECM credit line or term annuity.
The advantage of the HELOC is that the upfront costs are lower — in some cases, zero — and the interest rate in most cases will be lower than the HECM rate plus the HECM mortgage insurance premium. This means that, assuming the borrower withdraws the same amount of cash on both, after any given period the HELOC debt will be lower than the HECM debt. That is the case for using a HELOC to meet short-term needs.
But the HELOC has significant disadvantages that in many cases will shift the balance of advantage to the HECM.
1. The HELOC borrower must qualify based mainly on income and credit, as with any forward mortgage. Many seniors won’t qualify for a HELOC.
2. If the senior changes her mind about selling the house and decides she wants to remain, she is in trouble if she took a HELOC because the HELOC must be paid off. The HECM doesn’t.
3. The borrower using a HELOC as a source of additional cash is dependent upon being able to draw against the unused portion of the credit line. But the lender can cancel the unused line at any time, and will if a question arises about the borrower’s credit, income or property value. This is not a risk with a HECM.
Written by Elizabeth Ecker