When homeowners hear the definition of a Home Equity Conversion Mortgage (HECM), they’re often unsure how it differs from a traditional bank Home Equity Line of Credit (HELOC).
The HECM Credit Line has several obvious advantages for retirees that stand out over a traditional bank Home Equity Line of Credit (HELOC).
Watch Our “Home Equity Line of Credit Challenge” Video Below!
| HECM (Home Equity Conversion Mortgage) | HELOC (Home Equity Line of Credit) | |||
| Monthly Payments | Flexible Payment Options: You have the option EVERY month to pay interest-Only, Principal & Interest or NO payment at all. |
Interest-Only payments are required and then after the maturity date, you are required to make a Principal & Interest payment every month. | ||
| Reliability | Can NEVER be decreased, frozen or closed even if the housing market declines. | Can be decreased, frozen or closed anytime without warning, if the housing market declines. | ||
| Credit Line Limit | Credit Line Limit INCREASES automatically every year regardless of the home’s value. | Credit Line Limit does NOT increase every year. | ||
| Maturity Date | There is NO maturity date or reset date whatsoever. | Typically after 10 years there’s a maturity date. | ||
| Pre-Payment Penalty | Has NO Pre-Payment penalty if you decide to close the Credit Line. | Has a Pre-Payment penalty if you decide to close the Line of Credit. | ||
| Government Insured | The HECM Credit line is insured by the Federal Housing Administration (FHA). | There is NO insurance of any kind to protect you or your heirs. | ||
1. Credit Line Differences: Both HELOCs and HECMs provide borrowers with credit lines using variable rates. For a HELOC borrower must pay interest on any money used immediately and must repay the entire balance within the repayment period, usually 10 years. Also, after this draw period the remaining line closes and you can’t borrower anymore.
In contrast, HECM borrowers who draw on credit lines are not obligated to make any payments. There are NO required monthly payments and the HECM will never “reset” or “mature” like a HELOC.
2. Credit Line Growth: There are also important differences in how credit line amounts change over time. With a HECM, the portion of the credit line that is not used grows or increases every year. This is to ensure there will always be available funds to the homeowner.
Conversely, with a HELOC the amount of the initial line does not change. The bank also reserves the right to freeze or reduce the line of credit when adverse information emerges about the borrower’s credit or the housing market decreases. Also, there is typically a 10 year draw period and after this period the balance on the line will be amortized to a full Principal and Interest payment. For borrowers with large balances that were paying Interest-Only, this payment hike is typically called “Payment Shock”. (HECM’s are far better in both of these areas)
3. Protecting Against Future Adverse Contingencies: Because unused HECM credit lines grow over time, they provide insurance against a wide range of adverse contingencies, 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. (HELOCs don’t have this capacity)
4. Purchasing a Home with a HECM: With the HECM for Purchase, you can purchase a home with NO required monthly payments so long as you live in the property. For more information about this amazing purchase option please click here…. HECM for Purchase. (You can’t do this with a HELOC)
Another huge benefit of this type of Credit Line is that the available Credit Limit “grows” or increases with time. This growth is guaranteed by HUD and is not affected by the housing market. The Credit Line Limit available to you now will be much larger over time, ensuring Tax-Free money should you ever need it.
Simply put, with a HECM Credit Line in place, your lender has granted you a growing source of funds guaranteed for life as long as you live in the home.
This growth feature has been a subject of various research papers written by prominent Certified Financial Planners on the effectiveness of using a HECM Credit Line as part of an overall retirement planning strategy.
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For further details of the Federally Insured HECM Credit Line please call to speak to a licensed advisor at:
