While some homeowners looking to unlock the equity in their home could find a home equity line of credit (HELOC) to be a beneficial instrument to use, there are instances where a reverse mortgage could be a potentially better choice for qualifying seniors who are looking to remain in their home while accessing that equity in a different way. This is according to a new piece published at financial news website The Street.
“I think of HELOCs as a useful ‘break-glass-in-case-of-emergency” source of funds,” said George Padula, chief investment officer at Modera Wealth Management to The Street. “A HELOC is a loan and loans eventually need to get paid back. HELOCs can be beneficial; you just need to be careful and aware.”
Among the pros and cons a prospective senior client should consider when thinking about getting a HELOC are the variable rate; that most HELOCs only allow a borrower to pay interest monthly; how interest paid on a HELOC is not always tax-deductible; and the manner in which the lending institution can abruptly cancel its HELOC program.
“We always recommend our retired clients have at least six months’ worth of expenses set aside in cash for emergencies. Sometimes people push back and say they have a HELOC, so that’s their ‘emergency fund,’” said Matt Stephens, a financial planner to The Street. “I remember in 2008 with housing prices dropping, banks canceled HELOCs and people no longer had access to them at the exact moment they needed them.”
This is where a reverse mortgage can potentially be more beneficial for a senior than a HELOC according to Glenn Downing, a financial planner with Cameron Downing financial and investment management in Miami, Fla.
“The thing about HELOCs is that, like any other loan, they must be repaid,” Downing told The Street. “Even with an interest-only loan, taking out a HELOC creates a new cash outflow each month. And, as we saw in 2008-2009, banks can and do freeze these loans. There may be equity enough to meet the cash shortfall for a period of time, but once it has been used up, the borrower is in an even worse position than before the loan.”
A reverse mortgage, unlike a HELOC, cannot be canceled at the whim of the institution, explains Shelley Giordano, co-founder of the Academy for Home Equity in Financial Planning at the University of Illinois Urbana-Champaign.
“Regardless of dropping property values, the homeowner has full access to the HECM Line of Credit,” she explained to The Street. “Admittedly, a HELOC will cost less to set up, but does not come with the consumer safeguards and borrowing assurances provided by the FHA Home Equity Conversion Line of Credit.”
Read the article at The Street.