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What’s the Difference Between an HECM and a HELOC?

 

 

At a glance, a Home Equity Conversion Mortgage (HECM) and a Home Equity Line of Credit (HELOC) can look similar because both provide a revolving line of credit for home equity access and charge interest solely on the amount you’ve actually drawn. However, there are key differences.

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Watch Our “Home Equity Line of Credit Challenge” Video Below!

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Considerations for an HECM

Here are a few factors to consider for an HECM:

  • Repayment: With an HECM line of credit, payments are optional. Homeowners may choose to pay interest, pay principal and interest or make no payment at all.
  • Qualification requirements: You can often qualify for an HECM with credit scores as low as 400 because this lending option relies on income verification rather than a credit score.
  • Reliability: An HECM credit line cannot be reduced, frozen or canceled due to market conditions. 
  • Credit line growth: An HECM line of credit increases automatically over time, regardless of changes in home value.
  • Maturity and penalties: An HECM has no maturity or reset date and does not carry a pre-payment penalty.
  • Insurance and protection: An HECM is insured by the Federal Housing Administration (FHA), providing additional protection for borrowers and heirs.
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Considerations for a HELOC

Here are a few factors to consider for a HELOC:

  • Repayment: A HELOC requires interest payments during the draw period and later converts to mandatory principal and interest payments.
  • Qualification requirements: A HELOC for seniors often requires a minimum credit score of 680, which is higher than an HECM.
  • Reliability: A HELOC may be frozen or reduced by the lender if home values decline or lending guidelines change.
  • Credit line growth:  A HELOC credit limit typically remains static and does not grow.
  • Maturity and penalties:  A HELOC usually has a defined draw period, often around 10 years, and may include penalties for early closure.
  • Insurance and protection: Traditional HELOCs do not include FHA insurance.

What’s the Right Option for You?

An HECM line of credit is designed to provide long-term access to home equity with flexibility, stability and built-in safeguards. On the other hand, a HELOC has structured repayment and accessible qualification for seniors.

You may prefer having monthly payments and the structure of a traditional credit line. On the other hand, you may need the flexibility an HECM provides regarding payments. In terms of qualification, many seniors who wouldn’t qualify for a traditional bank HELOC can qualify for a senior-focused HELOC.

The HELOC appeals to seniors seeking debt consolidation and home improvement financing, while the HECM appeals to those seeking retirement funding without payment obligations.

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Discuss Your Needs With Us

If you’re considering an HECM vs. a HELOC refresh and want guidance tailored to your situation, a conversation with a licensed advisor can make all the difference. Call Senior Lending Corporation at 800-822-1190, or use our contact form, and we will help you understand your options and choose the path that best supports your retirement goals.

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