In the latest addition to my “HECM Versus…” series, I’d like to compare the reverse mortgage with the Home Equity Line of Credit (HELOC). For some borrowers, the dilemma is whether to obtain an HECM instead of a HELOC. For other borrowers, the dilemma is whether to use an HECM reverse mortgage to pay off an existing HELOC.

For those borrowers who are eligible for reverse mortgages (i.e. at least 62 years of age), the main appeal of selecting a reverse mortgage (instead of a HELOC) is that the reverse mortgage doesn’t need to be repaid in monthly installments. In fact, it only needs to be repaid when the last borrower passes away, and/or the property is no longer the borrowers’ primary residence. Only at that point (or if the borrower fails to pay property taxes, homeowners insurance, and/or fails to maintain the property) can the reverse mortgage be recalled, whereas a HELOC can be cancelled by the lender at any time. In addition, the proceeds from a reverse mortgage can be used for any purpose, whereas a HELOC might come with restrictions that govern the way the money can be spent.

The main disadvantage of a reverse mortgage is the price tag. Upfront costs include origination fees, a Service Fee Set Aside (SFSA), and a hefty FHA insurance premium. For every year that the reverse mortgage remains outstanding, it will continue to accrue interest, which will be added to the balance of the loan along with the annual insurance premium.

Otherwise, the two loans are structured similarly. For those that know that they want a line of credit, a HELOC and a reverse mortgage line of credit work the same way. You pay an origination fee for the right to use the line of credit, but with both loans, interest only accrues on money that is withdrawn. The interest rate on a HELOC is typically variable, whereas an HECM borrower can select a fixed rate or a variable rate.

For those borrowers that are trying to decide between a reverse mortgage and a HELOC, you should first ask yourself whether you will have the capacity to repay the loan. Since a HELOC can be obtained at a significantly lower cost, it is preferable to a reverse mortgage for those borrowers that are using the money for home-related improvements and have budgeted to repay the loan in a given time period. However, for those borrowers that are uncomfortable with a variable interest rate, the reverse mortgage might be the safer – albeit more expensive – choice.

The decision of using a reverse mortgage loan to repay a HELOC is more complicated. Obviously, it would have been ideal to have simply obtained a reverse mortgage in the first place, because under this scenario, you will ultimately pay two sets of origination fees. Anyway, if you misjudged your financial position and determine after-the-fact that you simply can’t repay the HELOC, the comparatively inexpensive solutions include borrowing money from family/friends, using your retirement account to repay the funds, or simply selling your home. If neither of these is realistic/desirable, a reverse mortgage could be your only way out.

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