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HELOC or HECM, what’s your choice?

For the 62-plus set, the HECM could be a better option

A substantial number of homeowners looking to access their equity choose a Home Equity Line of Credit, but for some homeowners a Home Equity Conversion Mortgage could be a better option.

Even though Americans are shying away from tapping their equity, the HELOC market has been pretty strong for quite some time, and experts predict it will grow. A report released by TransUnion last year estimated that 10 million consumers will take HELOCs between 2018 and 2022.

But what many people don't know is that sometimes, for those who've reached the qualifying age of 62, a HECM can be a much better way to access home equity, especially if you're looking to retire and want to ditch that mortgage payment. 

HELOCs and HECMs are both effective ways to extract home equity, so what makes one better than the other? 

The loans are similar because they both allow borrowers to retain ownership of their homes and borrow against their home equity. They also have the same obligations of other home-secured loans, such as paying homeowner's insurance and property taxes, and keeping the home in good repair. But that could be where the similarities end. (You can read a thorough rundown of there advantages and disadvantages here.)

What's important to note is the main advantage of the HECM is in the payment – there isn't one. While a HELOC requires borrowers to make monthly payments toward the principal loan balance, HECMs provide borrowers with a monthly payment (or, if they choose, a lump sum at closing).

This could be huge for retirees looking to get out from under their mortgage and find ways to supplement their income in retirement.

But compared with the overall HELOC market, the HECM market is tiny. Reverse mortgage originators haven't been able to crack the bias that has turned consumers away from the product.

An 2017 report from the National Council on Aging highlights the negative public perception attached to the product through a survey of financial advisors. 

When provided with a list of the attributes for products named "Line of Credit A" (a HELOC) and "Line of Credit B" (a HECM), 43% preferred the HECM while just 30% preferred the HELOC. When the names were revealed, the preferences switched, with 36% preferring the HECM and 37% opting for the HELOC.

Clearly, reverse mortgage comes with some negative connotations attached. But perhaps, as more Baby Boomers retire with fewer dollars in the bank, things will change. Maybe consumers (and their financial advisors) will be more willing to consider HECMs over HELOCs as a means to access their equity.


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