HELOC or HECM?

You hope that your clients are financially prepared for retirement, but you also know that there can be unexpected expenses or circumstances—including market declines.  The traditional hedge against these retirement-busting events has been to take out a home equity line of credit (HELOC) against the family home.  If there’s no emergency, no money is taken out and, therefore, no debt or debt expenses are incurred.  If the equity line IS tapped, the interest rate will be lower than an unsecured loan, and the money would be available immediately.  In a prolonged market downturn, this bridge loan could prevent a client from having to take distributions that lock in market lows or create taxable events.

Rob O’Dell, of Coyle Financial in Wheaton, IL and Naples, FL, believes that a better approach for many retirees is an FHA-insured home equity conversion mortgage (HECM), often referred to as a reverse mortgage.

Why?  For one thing, qualifying for a traditional home equity line of credit can be challenging for retirees.  Most traditional lenders require that the borrower have steady employment income, a high credit score, low debt-to-income ratio and significant home equity—and retired clients are usually unable to meet all these criteria.  Worse, lenders can reduce or freeze the HELOC at their whim.  And if the client accesses a HELOC, he or she is subject to monthly payments based on the lender’s terms, which can be changed, again, at the bank’s whim.

The HECM, on the other hand, creates a revolving line of credit that goes up each year.  O’Dell offers clients an illustration of a home worth $625,500 that qualifies for an initial line of credit amounting to $329,000.  But of course, that money won’t be needed immediately.  The credit line will grow at 6% a year regardless of house value, meaning that by the time a 65-year-old reaches age 84, the available funds will be nearly $1.2 million.

The HECM line of credit can never be frozen or cancelled so long as the borrowers meet the terms.  Monthly payments are not required (although interest and insurance costs will accrue) and the loan is government-backed.  There are no credit score or earned income requirements to get the line of credit in the first place, and with new government programs in place, eligible individuals can set up a HECM for as little as a $125 up-front cost.  If nothing is borrowed, there are no ongoing fees.

O’Dell is quick to point out that there are plenty of reverse mortgage programs that don’t fit this description.  “You see B-list actors on TV promoting reverse mortgages that are broker-driven,” he says.  “You look under the hood and you see high fees and pressure to draw down the line of credit.  But since 2015, advisor can go to the lender directly, vs. via a broker.”  He says that he’s been using Reverse Mortgage Funding, LLC (https://www.reversefunding.com/) for 20 of his clients.  There’s even a module now in MoneyGuidePro that calculates the impact of reverse mortgages on a client’s retirement sufficiency.