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When older homeowners wish to access a portion of their equity, there are multiple options.
Of course, selling the home is generally not desirable. A cash-out refinance is also not a prudent pathway for retirees. A refinance not only saddles the homeowner with a required monthly payment but will also typically result in a higher interest rate for those that refinanced in the last decade.
The Home Equity Conversion Mortgage (HECM) and the Home Equity Line of Credit (HELOC) remain as the primary options left for older homeowners who want to use their home equity to create more liquidity during retirement. Let’s define and compare them.
HOME EQUITY CONVERSION MORTGAGE (HECM): The HECM allows homeowners age 62+ the ability to leverage a portion of their home’s value without a required monthly principal and interest mortgage payment.* Many HECM borrowers will leave a portion of their available funds in an open line of credit.
HOME EQUITY LINE OF CREDIT (HELOC): The HELOC has no age requirement and is offered through lenders and local banks. It also allows the homeowner to draw a portion of the home’s value, but only for a defined period. Monthly principal and interest mortgage payments are also required.
Key differences
Both products give homeowners the ability to borrow a portion of the home’s value while continuing to own and live in their home. Both will also charge interest on the amount borrowed, but that is where the similarities end.
The HECM has higher upfront fees, although almost all of them are rolled into the loan. From there, the HECM will have the benefits of a traditional HELOC, plus some significant advantages listed here:
The HECM is currently offering lower interest rates
The HECM requires no monthly principal and interest mortgage payment*
The HECM maturity date is age 150, so long as all loan terms are met
The HECM line of credit cannot be frozen, reduced, or eliminated if home values decline
The HECM line of credit grows at the same rate as the loan balance, increasing borrowing power
With its flexible repayment structure, the HECM is the option that generally makes sense in retirement. It gives retirees the control, independence, and security they require. Furthermore, establishing the reverse mortgage line of credit early in retirement allows the unused funds to experience growth that will become more important as the borrower ages.
October 2024 update
Since my last rate update in September, the 10-year CMT weekly average, which calculates HECM expected rates, has increased by 29 basis points. We add the new weekly average (4.06%) to the lender margin, resulting in an effective expected rate for new HECM applications from Oct. 16 to Oct. 21, 2024.
The weekly average 1-year CMT is added to the lender margin and is used to calculate interest accruals. You’ll notice the 1-year CMT is precisely where it was last month. Consequently, the spread between the 10-year and the 1-year has narrowed. It appears the rate inversion we’ve had since July of 2022 may soon end.
*Borrower must continue to pay all property charges including property taxes, homeowner insurance, HOA dues, and more.
Graphics by Dan Hultquist. This column does not necessarily reflect the opinion of HousingWire‘s Reverse Mortgage Daily and its owners.
To contact the author of this story: Dan Hultquist at dan@understandingreverse.com
To contact the editor responsible for this story: Chris Clow at chris@hwmedia.com
