Reverse Mortgage vs HELOC

This is the final in a 3 part series of articles addressing Reverse Mortgages, sometimes call Equity Conversions or Equity Release.

In this article we will address an alternative solution to Reverse Mortgages or a New Way of thinking…HELOC Mortgage or Home Equity Line of Credit.

Fortunately, for the majority of families with good fiscal responsibility, there is another methodology that can be used to accomplish the same thing at zero (0) costs. It answers all of the same “desire and needs” that we have previously discussed. Most everyone has heard of the Home Equity Line of Credit, but many don’t fully understand its potential or how to use it.

Qualifying for an HELOC

For the most part, the underwriting for the HELOC would be the same as the underwriting for an HECM (Home Equity Conversion Mortgage), except for certain advantages.

You must have income resources such as Social Security or pension money and equity in your home.
You can qualify for an HELOC at any age over 18 years and you don’t have to wait until age 62 to activate the features that are available.
No fees to start an HELOC. Does zero expense to get access to your equity work for you?
Interest is charged based upon the average daily balance during the month.
There is typically an annual continuation fee of just $50.
HELOCs are available up to 85% of the value of the home or Loan to Value ratio (LTV). In some cases it is available up to 95% LTV and does not have the lower limitations of the HECM. You can then put more of your equity to work.
Interest rates for the HELOC or the HECM are essentially equivalent based upon the underwriting criteria of the lender. At this time the interest rate will be approximately 3.5% to 4%.
HELOCs function as a line of credit. You can withdraw and/or make payments to the loan as often as you like without any fees or penalties. This same feature is available in HECM.
The line of credit has the potential to increase over time as the value of the home increases.
- The HELOC allows increases based upon the appreciated value of the house.
- Over time, the available funds in an HELOC will outlast the HECM every time, even if the housing market is depreciating 1% per year.

Other Comparative Features

If you compare the HELOC to the HECM, you will find the HELOC outperforms the HECM every time.

The fees during the withdrawal benefit period will be substantially lower using an HELOC. As an example:
- If you are borrowing $500 per month from either loan type, and the withdrawal is increasing 2% each year to keep up with inflation, at the point that the HECM runs out of borrowing power, you will have paid an additional $59,000 more in fees and interest than you would if you were using the HELOC instead.
That means the HELOC will have almost 8 years more of additional borrowing power before it runs out.

HELOC Monthly Payments

The HELOC does have minimum monthly payments that are due based upon the balance in the loan and the interest rate of the loan. The need for monthly payments is covered by using the following technique that essentially results in the equivalency of no monthly payments.

Everytime you get a Social Security check, pension check or money of any kind from any resource, pay 100% of those dollars as a payment to the HELOC.
When you need to make a payment or pay bills, borrow the money back from the HELOC to pay your bills.
As far as the bank is concerned, you have been making your payments, even though the average daily balance of your loan may be going up.
- If, during the month you make payments of $2,500 to the line of credit, but you pull out $3,00 or $500 more for living expenses, your $2,500 paid to the balance of the line of credit constitutes the payment each month.
- So, instead of your check sitting in your checking account, put it to work reducing the interest due, then borrow out what you need for living expenses.
- The line of credit will grow by $500 per month, plus interest.
The other advantage is this methodology will reduce the average daily balance resulting in less interest charged to the account, leaving a greater portion available for a long time.