Reverse mortgages are quickly gaining acceptance as a viable means to increase income in retirement. And, in many cases, a reverse mortgage is an ideal tool to use - especially when the senior homeowner is confident in their ability to stay in their home seven years or more.
But many senior homeowners have taken out reverse mortgages only to end up paying them off (because of home sale, death, moveout, or other factors) within relatively brief periods. In fact, a 2007 HUD study shows that
fewer than half of all HECM reverse mortgages have lasted longer than six years
.
For shorter-term financing situations, it may be prudent to consider using a standard interest-only HELOC (home equity line of credit) in lieu of a HECM reverse mortgage. Under such a scenario, the borrower could draw from the line of credit, say, $1,000 each month for living expenses plus an amount sufficient to cover the monthly interest due on the loan. Similar to the way a HECM reverse mortgage works, loan interest would accumulate within the loan balance until it is paid off at the end of the loan period. Obviously, this tactic works only so long as there are adequate funds in the line of credit; for longer periods the strategy fails as HELOC reserves are exhausted while monthly loan interest payments are still payable.
Here are results of one
sample scenario
showing how a senior needing $1,000 additional monthly income for five years ends up with more home equity remaining at the end of the period using a HELOC rather than a HECM.
The main benefit of a HELOC is that upfront borrowing costs are much lower than a reverse mortgage. The main drawbacks are that 1) payments covering at least the acrued interest on the loan are required each month and, 2) lenders will require upfront proof of ability to repay the loan (including credit score review and income verification). Neither of these factors are issues with a reverse mortgages.
The calculator below can help users make useful comparisons between HELOC and HECM loans. Recognize that in the real world both HECM and HELOC loans almost always have "adjustable" interest rates that change over the life of the loan - a fact that this calculator ignores in order to keep comparisons manageable. Click here for a
comprehensive comparison of HECM and HELOC loans
.
Like all financial calculators, use it only as a guide and always be certain to get advise from qualified and trusted advisors in all important finacial matters.
