Home equity lines of credit (HELOCs) are a method for homeowners to tap into the equity they’ve built up in their homes. As a result, these products are often compared to reverse mortgage loans.
Major outlets, including CNET, have recently placed HELOCs and reverse mortgages side-by-side on lists of home equity products, which can lead to confusion for some people. But while HELOCs do not have an associated age requirement, a reverse mortgage borrower must be at least age 62 to take advantage of a Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM).
Reverse mortgage professionals are aware of the differences between HECMs and HELOCs, but some lenders may not be fully aware of specific differences between HELOCs and proprietary reverse mortgages. However, it’s worth keeping in mind the realities of freezing based on the needs of the borrower. Proprietary products can have an age requirement as low as 55 in some states.
That’s most especially true of borrowers seeking a reverse mortgage standing line of credit as opposed to another disbursement method, according to Jim McMinn, director of learning and development at Longbridge Financial.
“We want to sell the value proposition on this,” McMinn said during the National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting and Expo in Atlanta last month. “And so when we look at no monthly payments [being] required and that [a borrower will] never owe more than what the home is worth, we have additional cash flow so that liquidity [is there] when someone needs it to do the things that they want to do.”
McMinn also noted the HELOC comparison, adding a detail about freezing that some reverse mortgage professionals at the event were unaware of.
“HELOCs, that’s always something that we’re selling against,” he said. “The drawbacks on a HELOC [include that] it can be frozen. When you look at the proprietary [reverse mortgage] product, that also has the ability to be frozen. So, if somebody really needs the security of knowing that that line of credit is going to be there for them, then the HECM is the way to go. That gives that security, so rates may be on the rise, but these values are still going to hold true.”
At the start of the pandemic, financial institutions such as JP Morgan Chase instituted a freeze on HELOCs to weather the related economic turmoil. At the time, reverse mortgage professionals were enthusiastic about the prospect of selling their products against HELOCs.
“This certainly speaks to one of the advantages of the HECM program in that a reverse mortgage line of credit cannot be frozen or cancelled,” said Wade Pfau, professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com, in an interview with RMD. “A problem with traditional HELOCs is that they are often not available at the times of stress when they are most needed. They are not an alternative to a reverse mortgage when it comes to a buffer asset for retirement.”
Earlier this year, reverse mortgage professionals observed a rise in HELOC volume, which they said could lead to greater education on home equity tapping — and in turn could provide more reverse mortgage opportunities.
“On the flip side of [heightened HELOC activity], for a senior or somebody getting close to retirement, a HELOC has for the first 10 years an interest-only component,” said Jeff Markell, a reverse mortgage professional with Empire Home Loans. “Which, somebody that’s working may find that they can make that payment, no problem.”
The story could be very different for a senior at a different stage of life, he said.
“If they look at themselves 10 years down the road and they’re in retirement or their income is based upon Social Security and maybe a pension, they may not be making as much,” Markell said. “How are they going to make that principal and interest payment once year 11 kicks in?”
