It’s among the most common questions a potential reverse mortgage borrower faces: Would I be better off with a Home Equity Conversion Mortgage or one of the other retirement-funding options available to me, such as a “forward” home equity line of credit, an annuity, or even a less-common shared appreciation mortgage?
RMD scoured the web for the best comparison resources from both unbiased and potentially biased sources, and compiled them into this must-read resource for borrowers and lenders alike.
Is a HELOC Better Than a HECM? — Jack Guttentag, a frequent booster of HECM loans and a professor emeritus at the University of Pennsylvania’s Wharton School, compares home equity lines of credit (HELOCs) and reverse mortgages in this fall 2015 article for the Huffington Post, in which he largely concludes that HECMs are superior. Guttentag admits that upfront costs associated with reverse mortgages are higher, but touts multiple advantages, such as the lack of a draw-and-repayment period system, the ability to purchase a new home with a HECM, and the option for tenure, term, and line-of-credit loans.
Over 62? Which is Better, A HECM or HELOC for Tapping Home Equity in Retirement? — Over at NewRetirement, an online resource for retirement planning advice, an article that purports to compare HELOC and HECM options ends up firmly on the side of reverse mortgages, labeling HELOCs as short-term options and noting that reverse mortgage lines of credit remain available indefinitely, as long as the borrower meets the standard tax, insurance, and maintenance requirements. NewRetirement also takes a novel stab at the high fees that often scare off potential HECM users, asking readers to imagine the cost of a closing — which the author estimates at $6,000 to $8,000 for a $140,000 line on a $250,000 property — spread out over 10 to 15 years.
Reverse Mortgage or Home Equity Loan? — Investopedia provides this straightforward but informative comparison of lump-some home equity loans, HELOCs, and HECMs, complete with bullet points highlighting important differences in how lenders are paid, how borrowers are required to pay the lender back, and the various age and equity requirements inherent in each. After laying the groundwork, Investopedia recommends HECMs for people who need long-term retirement funding (though the article loses a point for referring to HECM proceeds as “income”), and suggests that HELOCs and home-equity loans are best used as short-term stopgaps.
Retirement Planning: Understanding Lifetime Annuities and Reverse Mortgages — While it’s a few years old, this article from Boston NPR affiliate WBUR’s “Here and Now” program throws annuities — another common and frequently misunderstood retirement options — into the mix along with longevity insurance and reverse mortgages. Ignoring the reference to the now-defunct HECM Saver program, the NPR piece gives a thoughtful and nonjudgemental description of the reverse mortgage program against these other retirement options.
Seniors’ Access to Home Equity — Buried deep in this recent Urban Institute report on why seniors don’t always access their home equity is a discussion of a curious option that hasn’t gotten much coverage: a shared appreciation mortgage, or a SAM. Under these agreements, the borrower receives a lump sum payment in exchange for a cut of the future home equity — either a gain, as the lender hopes, or a potential loss. Not typically advertised and relatively obscure, SAMs don’t represent a major threat to the HECM industry, but the Urban Institute researchers note that they could become a more widespread product regulators and lenders begin to take notice and take steps to streamline the program.
Written by Alex Spanko