HECM vs. HELOC: What are the advantages?

Today’s housing market has many looking for ways to cash in their equity, especially older homeowners. However, the standard HELOC isn’t the right choice for everyone. HousingWire recently spoke with Adrian Prieto, SVP of wholesale and third-party relations at Longbridge Financial, about the advantages of HECMs and how they better serve homeowners aged 62 and older.

HousingWire: What makes HECMs an advantageous alternative to HELOCs in today’s market?

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Adrian Prieto: When it comes to leveraging the value of a home, a home equity line of credit (HELOC) is probably the most well-known option. However, it’s not necessarily the most appropriate option for older homeowners, ages 62+.

Unlike HELOCs, reverse mortgages and jumbo reverse mortgages are designed specifically to help seniors manage their cash flow. They also offer senior homeowners more flexibility – most notably, through optional monthly mortgage payments1. And with a HECM, seniors cannot be locked into any possible payment spikes. That’s why it’s a much better product for retirees. Unfortunately, many who could benefit from it have never considered it.

For example, many people get a HELOC while still working—but the problem arises ten years later when they’re living on retirement cash flow that’s about 75-80% of what it used to be. And when their HELOC payment suddenly spikes up ten years after they’ve retired, it may create a serious cash flow problem. One that often results in customers refinancing from a HELOC to a reverse mortgage, once they realize it’s the better choice in the long run.

A HECM is insured by the Federal Housing Administration (FHA)2 and cannot be frozen or reduced at any time. But perhaps the biggest benefit of a HECM is that, unlike a HELOC, there are no monthly mortgage payments required1. The borrower simply needs to pay taxes, insurance and keep up to date on home maintenance. And with the average monthly payment on a 30-year fixed mortgage now hovering around $2,064 – this presents a major savings opportunity every month.

The HECM program also offers more flexibility compared to a HELOC. While HELOCs require money to be disbursed as a revolving credit as needed during a designated draw period, HECM offers several options for receiving funds. With a HECM, money can be disbursed either via a one-time lump sum, monthly payment, line of credit – or a combination of these methods. Plus, any unused portion of a line of credit can grow over the life of the loan, which is not the case with a HELOC.

Another advantage of HECMs over HELOCs is that they are less risky in terms of repayment. With a HECM, there is no deadline for paying back the loan. The loan does not become due until the final borrower no longer lives in the home, but they must continue to meet loan terms and use the home as their primary residence. And since a HECM is a non-recourse loan, the borrower and their heirs are not required to pay back more than the value of the home.

With a HELOC, the loan typically becomes due after ten years. However, making interest-only payments or paying the minimum required each month will not pay off the line of credit by the end of the 10-year period. In these cases, the bank may require a balloon payment – ​​a larger, lump-sum payment that covers any remaining balance. This requires the borrower to potentially come up with thousands of dollars at once to eliminate their debt.

HW: How are HECMs especially beneficial for homeowners age 62+?

AP: For homeowners ages 62 and older, HECMs offer a variety of benefits over HELOCs. In terms of loan eligibility, a HELOC requires borrowers to qualify based on credit score and income. For those homeowners who are retired or adjusting to a limited or fixed income, this is not ideal. With a HECM, credit score and income are not the sole determining factors. Instead, the borrower must simply be a homeowner at least age 62, use the home as their primary residence and have sufficient equity available in the home.

Another advantage of HECMs over HELOCs is that they’re FHA-insured and offer unique borrower safeguards. Along with the non-recourse protection mentioned earlier, HECMs also require borrowers to attend independent HUD-approved counseling as part of the process. This counseling session provides potential borrowers with the education and resources to decide whether the HECM is the right option, explore alternative financial solutions and provide support throughout the entire application process.

Senior homeowners also appreciate the HECM because there are no annual fees to keep the loan open. This is not the case with a HELOC.

HW: Why should brokers look to HECM loans to grow their businesses?

AP: Simply stated, there is a huge opportunity when it comes to senior housing wealth. Data shows that senior homeowners account for a record $11.58 trillion in home equity. And according to US Census data, two-thirds of the median net worth for households at least 65 years old comes from their home equity. The opportunity for retired seniors to tap into their home equity and unlock an additional source of cash flow in retirement, or even weather financial storms, such as market downturns cannot be understated.

Plus, with 10,000 baby boomers reaching retirement age every day, there is a growing population needing to free up more cash to fund their retirement. With so many advantages for senior homeowners, HECMs are a smart way for brokers to better serve this rapidly growing market and increase business success.

HW: How is Longbridge Financial helping brokers better serve their clients with HECM loans?

AP: At Longbridge, we’re committed to partnering with brokers of all experience levels, to help them diversify their businesses with HECMs and bring the benefits of the reverse mortgage program to as many clients as possible. In 2020, we launched our Reverse Made Easy program, designed to give brokers new to the reverse mortgage space the services and support they need to succeed with HECMs.

The goal of the program is to make it as easy as possible for brokers to offer reverse mortgages while continuing to focus on building their businesses. In fact, we even offer full loan processing functions in-house for our partners. Aside from operational support, Reverse Made Easy provides ready-to-use, customizable marketing materials via our online partner portal as well as a range of training resources – including sales coaching sessions, available in real-time or on-demand.

Longbridge also helps partners better serve their clients via our Longbridge Platinum proprietary suite of products. This non-FHA-insured reverse mortgage program was designed for borrowers with high-value homes or condos who do not qualify for a traditional HECM. And with Platinum, borrowers can access even more cash – up to $4 million.

In partnering with brokers of all experience levels, our sole focus is to help senior homeowners reshape their financial futures through HECM reverse mortgages. Our sales process reflects industry best practices. And our operations support staff delivers industry-leading turn-times – so you can provide the best service and support to your customers through the entire reverse mortgage process.

For more information on diversifying your business with reverse mortgages, visit wholesale.longbridge-financial.com.

1 Real estate taxes, homeowners insurance and property maintenance required.
2 This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with acting on behalf of or at the direction of HUD/FHA or any other government agency.

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