The line of credit feature on a reverse mortgage can help aging homeowners in a number of ways during retirement, but so can their traditional “cousin,” the home equity line of credit (HELOC). As a result, it is important for consumers to know the distinct differences between these products and how each one might best fit their unique needs, says a recent article published by the Huffington Post.
The article first defines both HELOCs and HECMs, discussing how their draw periods and repayment periods work, before delving into a few scenarios where one product might work best to accomplish certain goals.
“Where they overlap in meeting the needs of consumers, I could find only one situation where the HELOC might work better than a HECM,” writes article author Jack Guttentag, professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. “In all other situations where both could be used, the HECM worked better for the borrower.”
Additionally, the HECM can also be used for purposes that the HELOC “cannot touch at all,” adds Guttentag.
With a HECM, the portion of the credit line that isn’t used grows over time at the interest rate on the reverse mortgage, whereas with a HELOC, the amount of the initial credit line doesn’t change unless the borrower negotiates an increase, which Guttentag notes is uncommon.
Because unused funds grow over time in a HECM line of credit, they can be used to draw upon in the event of adverse financial conditions in the future, “including loss of pension income resulting from the death of a spouse, and exhaustion of the financial assets that were supposed to last a lifetime but didn’t,”—a capacity that HELOCs, on the other hand, do not have, Guttentag writes.
Another possible scenario where a HECM can assist borrowers where HELOCs cannot is when managing fluctuations in income.
“Both HELOCs and HECMs can be drawn against when income is low, and repaid when income is high,” Guttentag writes. “With a HELOC, however, this can be done only during the draw period.”
Read the Huffington Post article.
Written by Jason Oliva