HELOC vs HECM Comparison
HECM loans and HELOCs (home equity lines of credit) are both forms of home equity debt. The chart below compares important features of HELOC loans with the most popular type of reverse mortgage: the Home Equity Conversion Mortgage (HECM).
The comparison is based on general traits for each type of loan and is not intended to provide specific information about any particular lender or product. Terms and conditions can vary widely – particularly for HELOC loans. You should always check with lenders to get the most up to date information before making any borrowing decision.
For more detailed information about , click the highlighted words in this sentence.
| FEATURE | HELOC | HECM |
|---|---|---|
| Closing Costs and Fees: | Low-usually under $500 – sometimes zero closing costs | High-as much as 15% of amount borrowed |
| origination fee | Yes-often waived | Greater of $2,000 or 2% of home value (or lending limit) |
| appraisal fee | Yes-often waived | Yes |
| insurance premium | No | 2% upfront plus 0.5 percent charged monthly on outstanding loan balance |
| loan servicing fee | No | Yes |
| Age Qualification | None | Homeowner must be at least 62 |
| Income Qualification | Yes-lender must verify ability to make monthly payments-borrower typically must pass credit test-this sometimes is difficult fo seniors on fixed incomes | Minimal credit check to see if other federal loans are in default-otherwise, no income/credit checks |
| Market Size | Huge Market-according to Standard & Poor’s, more than 12 million loans originated just in the third quarter of 2005 | Small but Growing Market – According to HUD, more than 80,000 HECM loans were originated during 2006 |
| Lender Availability and Competition | Widespread-most banks, credit unions and similar financial institutions offer this product. Strong competition on rates, terms, fees and other loan features. | Limited-lenders are screened and approved by HUD.About 500 lenders nationwide ranging from very small to very large institutions (e.g. Wells Fargo). Most significant loan terms (rate, fees, etc) are set by law or regulation. Limited competition in some fee areas. |
| Typical Equity Position of Borrower | Usually substantial 1st mortgage balance outstanding, low to moderate equity position in home | Usually zero or low 1st mortgage balance outstanding, large equity position in home |
| Mortgage Type | Forward-loan balance declines and home equity grows as monthly payments are made to lender. | Reverse-loan balance grows and home equity declines as monthly payments are made to homeowner. |
| Payment Flow | Homeowner makes monthly payments to lender | Lender makes monthly payments to homeowner |
| Interest Rate on Loan | Variable | Variable |
| Interest Rate Index | Prime Rate | One-Year Treasury Rate |
| Interest Rate Margin | Varies by lender-strong competition | Set by federal regulation: monthly adjustable loan – 1.5% added to 1-year treasury rate; annually adjustable loan – 3.1% added to 1-year treasury rate. |
| Interest Rate Cap | Varies by lender – strong competition | Lifetime cap set by federal regulation: monthly adjustable loan-10% above initial rate; annually adjustable loan – 5% above rate. |
| Loan security | Secured by home equity, typically in second position behind primary mortgage | Secured by home equity, must be primary mortgage |
| Worst Case | If loan amount exceeds value of home (due to market downturn, etc), lender may be able to go after other assets of the borrower in addition to foreclosure on the home itself | Borrower can never owe more than the market value of home, even if loan amount exceeds this value. Other assets of the borrower are safe from lender’s reach (non-recourse loan) |
| Maximum Possible Loan Amount | Varies by lender-strong competition – some aggressive lenders may loan 100% or more of home’s equity.More typically, LTV is 80% | Market value of home or FHA 203b limit for county where home is located |
| Factors That Determine Actual Loan Size | 1) LTV-loan to value ratio, 2) homeowners’ income and ability to service monthly loan payments | 1) age of homeowner; 2) value of home, 3) HUD 203b limits |
| Required Counseling Prior to Getting Loan? | No | Yes |
| Taxes: | ||
| Interest Deductible? | Yes, generally-on balances up to $100,000 | Yes-but of limited value since interest is paid when loan is due (death or sale of home) |
| Loan Proceeds Taxable? | No | No |
| Loan Disbursement Options | Line of Credit-Borrower Draws Funds as Needed | Multiple Options: lump-sum at closing, line of credit, regular monthly payments (for fixed term or life annuity), or a combination of these. |
| Credit Line Growth | No credit line growth. | Line of Credit Option-Unused portion of credit line grows at rate of interest on loan. |
| Credit Line Draw Period | Typically 10 years | Funds can be drawn over life of loan |
| Prepayment Penalty | Typically None | None |
Related Posts
Reason 2: With a Reverse Mortgage There is No Risk of “Losing the House”
Reason 3: You Don’t Need Income to Qualify fo a Reverse Mortgage
Reasons Why a HELOC Isn’t the Answer to High Reverse Mortgage Costs
When a HELOC is the Better Choice
HECM or HELOC? A Tool to Help You Decide
Reason 1: HELOC’s Require a Monthly Payment; Reverse Mortgages Don’t
June 7th, 2006 at 1:13 pm
You need to get your facts straight!
You have several blatently inaccurate statements on your http://www.reverse-mortgage-information.org/326/heloc-vs-hecm-comparison.php page, particularly, with regard to counseling and origination fees.
June 7th, 2006 at 7:51 pm
Rick,
Thanks for pointing those out. I’ve corrected these points.
March 15th, 2007 at 10:47 pm
[...] In the right circumstances, reverse mortgages can be very useful and effective. But they are also extremely confusing to the average homeowner and there are many pitfalls (including high upfront costs and complex fees and interest rates) that can create big problems for the unwary. You’ll also want to be sure to consider other options for tapping equity like selling and downsizing or using a home equity line of credit (HELOC). HELOC’s can make more sense than reverse mortgages particularly if you think you might move from the home within five years. We found this useful chart that compare features of home equity loans vs reverse mortgages. [...]
March 22nd, 2007 at 8:17 am
You never brought up the point that if a senior falls on to hard times due to sickness etc, and cannot pay their Home Equity Loan, they will loose their homes. You can not get foreclosed on a Reverse Mortgage. That added security is wonderful for seniors that they can stay in their home for the rest of their life.
March 26th, 2007 at 4:45 pm
The table does include a “worst case” line but, perhaps better clarification of the foreclosure scenario would be helpful. I’ll change that. Thanks for the input Linda!
July 21st, 2007 at 2:04 pm
I live in Kent County, Michigan and your chart says the limit for a reverse mortgage is $200,160. What is the formula for how much equity you can take out of your home? I have a $350,000 house, can I take the whole $200k? Also, the limit hasn’t changed since 010106, do you see it changing in ’08? Thank you!
July 22nd, 2007 at 1:12 pm
Judi -
Other factors like age and outstanding mortgage balance come into play in addition to the $200,160 HECM 203b limit. Your best bet is to use one of the online calculators like those listed at . Most will ask for your zip code and figure in the applicable 203b limit.
And, yes I do expect the 203b limit to be adjusted upward for 2008. There is also legislation pending that could affect these limits.
October 25th, 2007 at 12:26 pm
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October 26th, 2008 at 12:56 pm
Home Equity Loans Faq…
Very cool post….
October 27th, 2008 at 5:15 am
nationwide homeowners insurance…
Can’t argue with that!…
December 7th, 2011 at 11:38 am
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January 24th, 2012 at 4:25 pm
great article – this can help seniors understand how the hecm can benefit them