Traditional Equity Lines vs. HECM

 
 
 
Set up cost
 
Bank can cancel
 
Bank can call note
 
Adjustable rate
 
Interest paid regardless of tax benefits
 
Monthly Payments
 
Must keep up taxes/ home insurance
 
Late/nonpayment foreclosure risk
 
Payment can increase with borrowing
 
Most money available
 
Available credit increases over time
 
Personally responsible for debt
 
Must be paid back on by specific date

Traditional Equity

Almost 0

Yes

Yes

Yes

Yes

Required

Yes

Yes

Yes

No

No

Yes

Yes

HECM
 
$3000 & up
 
No
 
No

Yes

No

Optional

Yes

No

No

Yes

Yes

No

No

Please keep in mind your bank/credit union equity line may or may not follow all of these assumptions.

One of the biggest challenges to retirement is cash flow.  Traditional equity lines require monthly payments.  This makes it highly unlikely they will solve cash flow issues.  The great risk I have observed in my 20 year career in banking I call payment creep.  The more borrowed, the higher the minimum monthly payment.  This results in some borrowers using the equity line to make the payments, which further increases the debt and minimum payment.  At some point, there are no more funds available and the borrower cannot make the payments.   With a HECM, payments are optional, so borrowers avoid this problem.

Of the many differences noted above, the HECM credit line growth is often the least appreciated.  Unlike the traditional equity line, the HECM credit line has a cost of living adjuster.  It grows each month at the same interest rate as that charged on any borrowed funds. This means the increase in the credit line is independent of the home’s value in the future.

Most agree retirement income strategies should be conservative. After all, we don’t need to prepare for the best that might happen; we need to prepare for the worst.  Home Equity Conversion Mortgage (HECM) can provide the homeowner greater security, control and choice, without increasing risk.