One More Essential Reverse Mortgage v. HELOC Resource

Pitching the benefits of a reverse mortgage over a home equity line of credit has emerged as a major marketing strategy for Home Equity Conversion Mortgage professionals, and now a prominent retirement blogger has added his voice — and some helpful charts — to the mix.

On his Tools for Retirement Planning blog, Tom Davison explores why a HECM line of credit “may be a far better choice for many retirees” than the traditional “forward” line, starting with some familiar facts: the amount of cash available grows over time, regular payments aren’t required, and the lender can’t freeze or cancel the line unless the borrower fails to meet the basic obligations.

While Davison writes that he regularly discussed HELOCs with his clients during his time as a financial advisor — and even maintained one himself as a standby hedge against emergencies — he firmly comes down on the side of the so-called “ReLOC,” which in his telling can stand for either a “reverse” or “retirement” line of credit. 

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He uses the example of a 63-year-old homeowner who decides to tap into $200,000 of home equity on a $400,000 home. With a “forward” home equity loan, that $200,000 of availability remains steady for the life of the loan, which eventually comes due at the end of a 10-year draw period. Starting at age 73, Davison writes, the borrower must pay $1,212 per month, for a total of $14,544 per year, at an interest rate of 4%.

“With those payments, it would take until the homeowner is 93 years old to pay it off,” Davison notes. “The HELOC repayment works the same way as a traditional mortgage: no draws and can’t skip payments. The HELOC’s flexibility ends when the loan switches from the draw to the repayment period.”

Had the same homeowner selected a HECM line of credit instead, she’d be able to access up to $120,000 during the first year and then the remaining $80,000 starting in the second year of the loan period. But if the borrower does nothing, the major potential advantage begins to appear.

“By the time our homeowner turns 80, if they had not tapped their $200,000 ReLOC, they could withdraw $400,000,” Davison writes. “Or nearly $600,000 at age 90, and $800,000 at age 97.” 

He goes on to point out that this growth could end up outpacing a retiree’s investment portfolio depending on the circumstances, and that unlike with a HELOC, repayment isn’t required unless the borrower leaves the house or passes away.

“The homeowner may find making payments very beneficial,” Davison writes, echoing a new “flexible payment” pitch adopted by some reverse mortgage professionals. “A payment both reduces the loan balance and increases the amount that grows and can be borrowed again. More flexibility stems from the fact that the maximum amount owed on the loan is limited to what the house is worth when the homeowners leave it.”

To read Davison’s full post, as well as to check out some visuals illustrating the differences between the two types of loan products, visit Tools for Retirement Planning.

Written by Alex Spanko

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  • Now we have a new kind of line of credit, the ReLOC? By poor language practice and lack of care in word choice we are ruining some excellent strategies and concepts. It is ridiculous to see dumbing down in such a small industry.

    The so called “Dean of Financial Planning,” Harold Evensky named a specific strategy the Standby Reverse Mortgage. When applied to a HECM (the only reverse mortgage currently offering a line of credit), there is nothing wrong with calling it the Standby HECM. Soon members of the industry began substituting the name Standby Line of Credit for the term Standby HECM. They naively saw and see nothing wrong with a free interchange of those terms.

    What they do not recognize is that the phrase Standby Line of Credit is a very old business term that has been used in corporate and business generally for decades; I learned about it four decades ago in corporate finance and it is still in use today. It has a specific meaning much different than we use it in our industry. Its far more common use is a strategy to obtain a line(s) of credit sufficient to cover at least working capital needs (if not substantially more) in times of lenient credit approval and keep it active so that it can be utilized when unexpected cash needs arise in a growing business.

    So why have we intentionally renamed the Standby HECM into the name Standby Line of Credit? It certainly is not because of our deep understanding of financial and retirement planning or advising.

    Now we have the ReLOC. Why? No reverse mortgage company is offering any reverse mortgage other than HECMs which have a line of credit. What is wrong with staying with the HECM LOC? It is far more accurate and far less confusing.

    I do not oppose Dr. Davison’s goodhearted intentions for the industry. But his formal education in psychology is insufficient grounds to coin new terms and our industry adopt them when such terms can potentially cause confusion.

    • Cynic –

      In my opinion, your thinking and terminology is too rigid…and may well confine your otherwise good message to the ranks HECM professionals. Dr. Davison’s use of a consumer-friendly and conversation starting term like “Retiree Line of Credit” is exactly what we need to break down the barriers of resistance to our product.

      The term ReLOC is neither misleading nor confusing. It is also neither off-putting nor ‘over the head’ of the average consumer as the terms “reverse mortgage” and “HECM line of credit”, respectively, often are. Rather it uses terms with which our consumer prospects are familiar and comfortable, and opens otherwise closed doors for a more detailed conversation.

      I think Dr. Davison is right on target here with both his approach and choice of words, and is doing our industry a great service with both this piece and his significant other work on his blog.

      • REVGUYJIM,

        I am sure by the end of its first year of production, Ford thought of a few other names to call it but Edsel it was and Edsel it will always be.

        No one is saying that Dr. Davison is not a smart guy; he is a smart guy. But after 25 years…

        If you look at the RMF focus group video ad, you will not see better names, cool terminology, or anything else (including equity release) of that manner being used and believe it or not out of 88 participants and NCOA presenting the info, 85 chose HECM LOCs over Traditional LOCs. They actually called the HECM LOC a mortgage over and over again and yet look at the overwhelming results.

        Ever since I came into the industry the cry for a new name has been there. Even vastly improved and much better jargon, I doubt if anyone would have much better results than the RMF focus group HELOC Challenge ad.

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