Many acronyms are used in the mortgage world, so many that it’s easy to get confused. When you’re looking for ways to turn the equity in your home into cash, two of those acronyms should stand out—home equity conversion mortgage (HECM) and home equity line of credit (HELOC). Both a HECM and a HELOC can help turn your home equity into ready cash. However, they have some distinct similarities and differences you need to know when comparing a HECM vs. a HELOC.
What Is a HECM?
A HECM is a reverse mortgage insured by the Federal Housing Authority (FHA). Seniors aged 62 and over can access a portion of the equity they have in their homes without having to make monthly mortgage payments. You can request these funds in a lump sum, as monthly payments, as a line of credit, or in combination.
Borrowers are required to meet all the loan terms, including paying property taxes, paying homeowner’s insurance, maintaining the property, and additional loan obligations. The U.S. Department of Housing and Urban Development (HUD) provides a detailed handbook for more in-depth information.
Get your free reverse mortgage information kit
Request Info
What Is a HELOC?
A HELOC is only available as a line of credit. It is a loan set up with a maximum draw amount for a finite period of time. Usually, the draw period runs from 5-10 years. During that prescribed time, you only have to pay the interest on the money you withdraw. However, you must pay off the principal and interest, either in installments or with a single payment when the draw period ends.
Armed with this information, you can decide on which works the best for your situation, HECM vs. HELOC.
HECM vs. HELOC: A Comparison
A side-by-side comparison of the two ways to exchange the equity in your home for cash looks like this:
HECM: You aren’t required to make monthly mortgage payments.
HELOC: Requires monthly mortgage payments.
HECM: While you remain in your home and meet the requirements of the loan, you don’t have to pay back this money.
HELOC: This loan must be repaid, usually within 10 years.
HECM: You’re required to obtain HUD-approved counseling to make sure you completely understand your choices.
HELOC: Counseling is not required.
HECM: You must be at least aged 62 or older.
HELOC: No age requirement.
HECM: The home you have equity in must be your primary residence.
HELOC: Check with your lender to see if you must live in the home.
HECM: The unused portion of the line of credit can grow during the life of the loan.
HELOC: The maximum line of credit does not change during the draw period.
Both HECM and HELOC: You still must pay property taxes, homeowner’s insurance and maintain the home.
Armed with this information, you can decide on which works the best for your situation, HECM vs. HELOC.
HECM vs. HELOC: Choosing the Right Loan
Take some time to assess your personal situation and your goals. Will you be staying in your current home long term? Do you plan to pay off the loan soon? How much equity do you have in your home? How’s your credit score, and do you have a regular source of income?
Your financial situation will likely determine which product, a HECM or a HELOC, will work the best for you. Also, consider how much money you need for what you have in mind and which product will get you that amount of cash.
Your best bet is to get advice from a trusted financial advisor.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
