WHY A HECM Is BETTER THAN A HELOC

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 structures of both seem similar:
  •   Both are lines of credit against your home
  •   Both have interest on only the amount that is borrowed
However:
The HECM Credit Line has several obvious advantages for retirees that
stand out over a traditional bank Home Equity Line of Credit (HELOC).

HECM Advantages:

HECM (Home Equity Conversion Mortgage) HELOC (Home Equity Line of Credit)
Monthly PaymentsFlexible 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.
ReliabilityCan 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 LimitCredit Line Limit INCREASES
automatically every year
regardless of the home's value.
Credit Line Limit does NOT
increase every year.
Maturity DateThere is NO maturity date
or reset date whatsoever.
Typically after 10 years
there's a maturity date.
Pre-Payment PenaltyHas 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 InsuredThe HECM Credit line is insured
by the Federal Housing
Administration (FHA).
There is NO insurance of
any kind to protect you
or your heirs.

A More Detailed Breakdown of the Differences :

  1. Credit Line Differences:  Both HELOCs and HECMs provide borrowers with credit lines using variable rates. 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 so long as they reside in the house.  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.  Lenders also reserve 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. Meeting Intermittent But Temporary Expenses:   A borrower 62 or older faced with the need to finance outlays that will occur intermittently over future months — financing additions to a home, for example — can finance them with either a HELOC credit line or a HECM credit line.  In both cases, they will be borrowing with an adjustable rate mortgage that exposes them to the risk that interest rates will rise during the draw period.

    If the borrower intends to repay the balance shortly after the outlays have been completed, the HELOC probably will be more cost-effective, because the initial interest rate and upfront fees are lower. However, over extended periods borrowers are more exposed to interest rate increases on HELOCs because rate maximums are higher and there are no rate adjustment caps as there are on HECMs.

  4. Managing Fluctuations in Income:   Both HELOCs and HECMs can be drawn against when income is low, and repaid when income is high. (With a HELOC, however, this can be done only during the draw period)

  5. 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)
  6. 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)

A HECM Credit Line is Guaranteed to Grow!

Another huge benefit of this type of credit line is that the amount you can borrow increases each year at the same interest rate applied to the existing balance.  You also only pay interest on the funds you access, and have the option to pay down your line of credit at any time.   Simply put, under a HECM Credit Line, the lender has granted you a growing source of funds to use whenever you want.

This growth feature has also been the subject of various research papers written by financial planners on the effectiveness of using a HECM Credit Line as part of a
retirement planning strategy
. One reason is that a credit line can be used to extend the life of a retiree’s investment accounts, while at the same time protecting assets from market volatility.

For example, someone who is planning for a 30-year retirement may live by the traditional “4% rule” used in financial planning, which involves spending no more than 4% of your savings in the first year of retirement and then adjusting this spending level each year based on inflation.

By setting up a HECM Credit Line at the earliest possible age (62) and letting the funds grow untouched, retirees may be able to spend up to 6% of their savings in the first year of retirement, if they plan to have funds to sustain them for a 30-year retirement, according to research published recently in the Journal of Financial Planning.  (There is NO growth with a bank line of credit)


As you can see in every situation the Federally Insured HECM Credit Line is far better than a traditional bank Line of Credit.

Please feel free to input your information on the right for further details of the Federally Insured HECM Credit Line or for faster response please call us at 1-800-822-1190.


Senior Lending

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