Traditional Equity Lines vs. HECM
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, 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.