HECM vs. HELOC:
Which has the advantage?
A Home Equity Conversion Mortgage (HECM) Line of Credit is
a beneficial alternative to a traditional Home Equity Line of Credit
(HELOC) for customers age 62 and older.
By Mike Mooney
This is the second in a series of articles examining HECM loans in light of recent program enhancements. The first, in the
September/October 2015 ABA Banking Journal, showed how a HECM can provide a much-needed source of retirement funding.
This article explains how a HECM Line of Credit offers some significant advantages as compared to a traditional HELOC.
Are some of your borrowers about to experience “payment shock”? Many of the HELOCs
that originated during the housing-price bubble are scheduled to reset between 2015 and
2018. It’s estimated that five million homeowners age 62 and older have HELOCs, of which
three million are a first lien.1 After 10 years of paying interest only, many of these borrowers
will start making payments on both principal and interest. For those who are approaching or
in retirement, this additional cost may be more than their already-strained monthly budgets
can bear.
Refinancing the outstanding balance on the HELOC into a HECM—commonly known as a
reverse mortgage—would afford them flexible repayment options. With a HECM, no monthly
repayments are required, but the borrower may choose to pay interest or principal at any time.
(As with any home-secured loan, the borrower must keep current with property-related taxes,
insurance, and upkeep of the home for the loan to remain in good standing.)
A HECM Line of Credit offers the benefits of a traditional HELOC, plus some distinct
advantages for customers age 62 and older. So it’s important to be able to present both
options—whether they’re shopping for a HELOC, or their existing HELOC is about to reset.
continued on next page
Here’s an overview:
HECM
Line of Credit
Traditional
HELOC
Options with reduced closing costs are available
✓
✓
✓
✓
No monthly repayments required*; no risk of rising monthly loan payments
✓
Unused line of credit grows, making more funds available over time
✓
Line of credit cannot be reduced or revoked by the lender, as long as the
borrower meets their obligations*
✓
Federal Housing Administration (FHA)-insured loan
✓
Non-recourse feature
✓
Feature
Borrower retains home ownership
*Borrower is responsible for property taxes, homeowners insurance, and property maintenance. A HECM is a home-secured debt payable upon default
or a maturity event.
Like traditional HELOCs, HECM loans allow people to retain ownership of their homes and
borrow against their home equity—but with a HECM, they won’t have the burden of monthly
loan payments for as long as they live in the home as their primary residence.
For customers whose HELOC is about to reset, a HECM may even allow them access to
additional funds without any risk of rising monthly loan payments.
Unlike a HELOC, a HECM Line of Credit cannot be reduced or revoked by the lender, as
long as the borrower meets their obligations (keeping current with property taxes, insurance,
and upkeep of the home, and living in the home as their primary residence). Plus, the unused
portion of the credit line grows, making more funds available over time—so the less funds they
take now, the more they will have in the future.
For trusted banks with established customer relationships, these loans provide another option
to help meet the needs of the important—and rapidly growing—older-adult segment, offering
them an advantageous alternative to a HELOC or home equity loan.
Your customers’ home equity is a more valuable asset than ever.
The need is there among Americans age 65 and older: 43 percent have a net worth of less
than $249,0001, indicating that many aren’t financially prepared for the future. For many,
relying on their savings won’t be an option—14 percent have no retirement savings at all.2 The
median retirement account balance for people approaching retirement is a mere $14,500.3
And the average “Baby Boomer” has less than $50,000 in retirement savings4.
That’s why home equity has become such an important part of their financial plans. As a
percentage of home value, equity has increased from 39 percent in 2008 to 54 percent
in 2014.5 It’s estimated that the total value of home equity owned by older adults is nearly
$4 trillion.6 However, if they use a traditional HELOC, they will face an additional monthly
payment.
continued on next page
A reverse mortgage can help older adults reverse the rising-payment cycle and give them the
flexibility to manage their monthly cash-flow needs. A HECM Line of Credit can serve as a
“rainy-day” fund or standby line of credit that they can tap into when they need it, to help
preserve their assets and extend the life of their portfolios.
It’s time to take a fresh look at reverse mortgages.
Recent changes to the FHA-insured HECM program have made reverse mortgages more
flexible and valuable than ever. The Reverse Mortgage Stabilization Act of 2013 added
more consumer protection and helps create a more sustainable program, with enhancements
such as:
New

limitations on the amount that can be drawn at closing and in the first year—to help the
borrower’s home equity last longer
A

required financial assessment on each application—an evaluation of the mortgagor’s
willingness and capacity to timely meet his or her financial obligations and to comply
with the mortgage requirements—helping ensure that borrowers can meet their
ongoing obligations
An

adjusted Mortgage Insurance Premium (MIP), so borrowers who draw less, pay less
up front
Added

protection for non-borrowing spouses
For banks and homeowners, this has helped reduce risk, ensuring the stability of the program
and broadening its appeal. It has also spurred new products with more options to meet a wider
range of needs. For example, Reverse Mortgage Funding LLC (RMF) has an innovative,
low-cost HECM option that eliminates nearly all closing costs7—an attractive benefit for
older borrowers.
It should be noted that there’s one change that does not affect reverse mortgages: they
are expressly excluded from the new TILA-RESPA Integrated Disclosure (or TRID) rules
for lenders.
Who is a candidate for a HECM Line of Credit? Any of your customers age 62 or older who
fit into one or more of these categories:
Customers

Those

considering a traditional HELOC
who have a current HELOC about to reset
Customers

who have cash-flow constraints and prefer not to make monthly
mortgage payments
continued on next page
What’s the first step in exploring HECM loans? Banks interested in offering HECM loans
should first consider the level of partner support that they would need. RMF’s HECM lending
platform, endorsed by ABA through its Corporation for American Banking subsidiary, works
with banks in a number of ways, including a turnkey solution designed specifically for banks.
The service level a bank requires depends on its individual business needs and goals. Those
that are new to reverse mortgages, and don’t want to invest in infrastructure, should consider
turnkey options that:
Minimize

Offer

compliance burdens
outsourcing of processing and underwriting
Provide

training, loan origination technology, marketing support, and other resources that
allow for simple and easy setup
There are opportunities for banks and customers alike. For banks, offering reverse mortgages
can help retain existing customers, reduce deposit attrition, and grow wallet share. Rising
home values are providing increased home equity for homeowners, and the pool of potential
HECM borrowers is increasing: older adults are projected to make up 20 percent of the U.S.
population by 2030.8 They’re looking for solutions from trusted sources like local banks.
By offering reverse mortgages, you can offer another option to help them get the funding
they need.
Mike Mooney is a sales leader with Reverse Mortgage Funding LLC.
ARTICLE SOURCES:
1
MRI 2013, Doublebase.
2
Bankrate.com survey, August 18, 2014.
3
“The Continuing Retirement Savings Crisis,” Nari Rhee, Ph.D., and Ilana Boivie, National Institute for Retirement Security, March 2015.
4
Ric Edelman, author, radio host, and CEO of Edelman Financial Services, as quoted in USA Today, “Some states move to help spur retirement savings,”
by Rodney Brooks, January 27, 2015.
5
Neilsen independent study, 2014.
6
https://www.nrmlaonline.org/about/press-releases/senior-home-equity-nears-4-trillion-as-home-values-rise.
7
Not available in all states. Terms and conditions apply.
6
Mintel, 2013.
This material has not been reviewed, approved, or issued by HUD, FHA, or any government agency. The company is not affiliated with, or acting on
behalf of or at the direction of, HUD, FHA, or any government agency.
NOT FOR CONSUMER USE
Company NMLS ID: #1019941 (www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/1019941). Reverse Mortgage Funding LLC
(“RMF”) is headquartered at 1455 Broad Street, 2nd Floor, Bloomfield, NJ 07003, telephone number 973-842-2448. RMF conducts business in
the following states: Alaska Mortgage Broker/Lender License #AK1019941; Arizona Mortgage Banker License #0927682 – 21907 N. 77th Street,
Scottsdale, AZ 85255; Licensed by the California Department of Business Oversight under the California Residential Mortgage Lending Act, License
No. 4131266; Loans made or arranged pursuant to a California Finance Lenders Law license, License No. 603K578; Colorado Mortgage Company
Registration, Regulated by the Division of Real Estate. To check the status of your Colorado loan originator, visit http://www.dora.state.co.us/realestate/index.htm; Licensed by the Delaware State Bank Commissioner, Licensed Lender #012573; Georgia Mortgage Lender Licensee #36793;
Illinois Residential Mortgage Licensee #MB.6760963; Kansas Licensed Mortgage Company, License #MC.0025179; Massachusetts Mortgage
Lender License #ML1019941; Licensed by the Mississippi Department of Banking & Consumer Finance #1019941; Licensed by the New Hampshire
Banking Department #18336-MB; Licensed by the New Jersey Department of Banking & Insurance; Rhode Island Licensed Lender #20132869LL;
Texas Mortgage Banker Registration and Loan Servicer Registration, 6044 Gateway East, Suite 236, El Paso, TX 79905 and 12710 Eagle Ledge Lane,
Tomball, TX 77377. RMF also conducts business in AL, AR, CT, DC, FL, HI, ID, IN, IA, KY, LA, ME, MD, MI, MN, MT, NE, NV, NM, NC, ND, OH,
OK, OR, PA, PR, SC, SD, TN, UT, VT, VA, WA, WV, WI, and WY. Not all products and options are available in all states. Terms subject to change
without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval.
©2015 Reverse Mortgage Funding LLC. L269-Exp102016.