If you own a home and want to tap into your equity to access funds, a traditional home equity line of credit is one option. But for homeowners 62 and older, it’s not the only option. In fact, a home equity conversion mortgage line of credit might be more suitable if you’re in this age group.
Commonly known as a reverse mortgage, an HECM loan has several advantages over a HELOC, including a flexible payment feature. If you’re dismissing the idea of a reverse mortgage loan based solely on the name, you could be missing out on the benefits of a HECM line of credit.
Here are four reasons why you should consider an HECM home loan. To better decide if it’s an option for you, research reverse mortgage lenders and reverse mortgage rates — and find out how a reverse mortgage works.
1. HECMs Offer Flexible Repayment Options
An HECM flexible line of credit and a traditional HELOC enable you to borrow against the equity in your home while you continue to own and live in it. If you have a traditional HELOC, however, in addition to paying property taxes and homeowners insurance, you must also make principal and interest payments each month until your loan is paid off.
An HECM flexible line of credit enables you to repay as much or as little as you like each month — or not make monthly loan payments at all. As with any home loan, you must continue paying for property-related taxes, insurance and upkeep.
As long as you fulfill those obligations, you don’t have to repay the total loan balance until you sell the home or it’s no longer your primary residence. Paying off the loan with proceeds from the home’s sale is typical, but you can choose to repay it anytime with any available funds — without a prepayment penalty.
2. HECMs Have No Reset Periods
It’s important to understand that with most traditional HELOCs your required monthly payments can increase significantly. During what’s called the drawdown period — typically the first 10 years — on a HELOC, you generally make only interest payments.
Your interest-only payments will increase as you borrow more money. But after the drawdown period, the loan resets and you are required to make principal payments plus interest — which means you’ll see a sharp increase in your required monthly payments. If you choose a HECM line of credit, however, you’ll have more freedom and flexibility managing your monthly expenses.
3. HECMs Offer More Security
HELOCs and HECMs are home-secured loans, which means that the property stands as collateral for the debt. However, unlike a HELOC, a HECM is an FHA loan, which means it’s a government-insured, non-recourse loan.
If you have as HECM and the loan balance ever exceeds your home’s value, neither you, your heirs nor your estate are responsible for paying the excess amount. In addition, you can’t have your HECM line of credit canceled or reduced as long as you meet your loan obligations — so it will be there if and when you need it.
4. HECMs Have a Credit Line Growth Feature
Unlike a HELOC, the unused portion of a HECM line of credit grows over time, giving you more available funds. In other words, if part of your loan is held in a line of credit you can draw on, the unused portion of the credit line will grow in size each month.
The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan. The less you take out upfront, the more you’ll be able to borrow later.
HECMs: Basic Eligibility Requirements
You might be eligible for an HECM flexible line of credit if you are at least 62 years old, own your home and live in it as your primary residence. Most condominiums also qualify.
You might even qualify for an HECM if you weren’t able to get a HELOC, or if you still have an existing mortgage, home equity loan or HELOC. To learn more, you can speak with a licensed reverse mortgage specialist to find out more about mortgage rates.
Disclaimer: The author is not licensed to originate or solicit mortgage loans. 2017 Reverse Mortgage Funding LLC, 1455 Broad Street, 2nd Floor, Bloomfield, NJ, 07003, 1-888-494-0882. Company NMLS ID: #1019941 (www.nmlsconsumeraccess.org, http://www.nmlsconsumeraccess.org). Arizona Mortgage Banker License #0927682; licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act; loans made or arranged pursuant to a California Finance Lenders Law; Georgia Mortgage Lender Licensee #36793; Illinois Residential Mortgage Licensee; Massachusetts Mortgage Lender License #ML1019941; licensed by the New Jersey Department of Banking & Insurance; Rhode Island Licensed Lender; Texas Mortgage Banker Registration in-state branch address 6044 Gateway East, Suite 236, El Paso, TX, 79905. Not intended for Hawaii and New York consumers. Not all products and options are available in all states. Terms subject to change without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval. L820-Exp022018.