Over 62? Which is Better a HECM or HELOC for Tapping Home Equity in Retirement?

If you are like many retired American homeowners, you may have seriously considered accessing your home equity through a  Home Equity Line of Credit (HELOC).

Utilizing a traditional HELOC can be a great short term solution to bridge the gap on unexpected expenses, consolidate higher interest debt, or make home improvements.  However, this type of loan does require financial planning and careful consideration.
HECM or HELOCDo you love your home? Explore ways to use home equity to stay in your home for retirement.
Obtaining financing during your retirement years, even if secured by real property, can also come with several hurdles.  You may have trouble qualifying if your income levels are inadequate, or your credit score is less than desirable.  Even if you can meet credit and income requirements you may find the interest rate less favorable than current market interest for fixed term loans.  Another downside is if you fall behind on payments you could risk facing foreclosure, and this risk in itself is enough to cause seniors to shy away from a home equity loan.

If you have plenty of equity in your home and worry about some of the hurdles just mentioned, there may be a lesser known solution out there for you.  A Home Equity Conversion Mortgage (HECM – also known as a Reverse Mortgage) has a line of credit option that allows you to borrow a portion of your home without the obligation of a monthly payment.

Many people don’t realize that a HECM has this flexible line of credit option and it comes with the same benefits of a reverse mortgage: no required monthly mortgage payments, doesn’t become due until the last borrower leaves the home, and any remaining equity belongs to the borrower or their estate once the loan is repaid.  Once established your HECM line of credit is guaranteed to be there as long as you maintain the terms of the loan, which include:  maintaining the home as your primary residence, staying current on property taxes and homeowner’s insurance, and keeping the property adequately maintained.

A HECM is a Line of Credit that 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 reverse mortgage line of credit, the lender has granted you a growing source of funds to use whenever you want (and you only pay interest on any amount drawn down – so if you don’t use it or carry a large balance – the costs remain relatively low).

This growth feature has also been the subject of various research papers written by financial planners on the effectiveness of using a reverse mortgage 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 reverse mortgage line of credit 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.

HECM is Currently Available at a Cost Savings

Those who have explored the HECM line of credit in the past may have been put off by the seemingly high closing costs.   For example, a 68 year old with a home value of $250,000 might find a HECM Line of Credit would allow them to establish a $140,000 credit line that came with $6,000-$8,000 in closing costs.  Even though these fees seem substantial, consider those costs spread out over 15-20 years, or the anticipated life of the loan.

Lenders have recognized that the HECM line of credit closing costs have made retirees less likely to utilize a HECM line of credit.  And so, to help build awareness for this home equity solution, many lenders have started to offer a lower cost HECM line of credit. Today several lenders offer a little-to-no closing cost HECM line of credit with the highest growth rates possible.

If your home is paid off, or you have substantial equity in your home, then a reverse mortgage line of credit may do wonders for your retirement finances. The sooner you establish a HECM line of credit, the more time it has to grow.

Let NewRetirement help you explore this option.  Get connected to a lender offering a lower cost home equity line of credit.

NewRetirement Planner

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