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Weighing the options of accessing home equity for today’s retiree
A recent article “Is a HELOC better than a HECM?” in the Huffington Post explores the question as to what type of equity loan may be more appropriate: the traditional HELOC or home equity line of credit or the Home Equity Conversation Mortgage line of credit.
In a candid statement the article begins stating “where they overlap in meeting the needs of consumers, I could find only one situation where the HELOC might work better than the HECM,” said contributing columnist Jack Guttentag, better known as the Mortgage Professor.
Guttentag outlines the key features of a HELOC including draw periods, repayment periods and the terms of repayment. He then proceeds to differentiate the two typical options for older homeowners seeking to access a portion of their home equity.
Repayment:
“The HELOC borrower must pay interest on line usage immediately and must repay the entire balance within the repayment period,” Guttentag states. Such obligations we know can be especially burdensome for older homeowners who typically have a fixed income. The more of the credit line they use the larger the current and future payment obligations become. Even worse some homeowners today are experiencing ‘payment shock’ now that they have entered the repayment period being obligated not just for interest-only payments but fully amortized payments.
Credit Availability:
The dirty little secret in HELOCs came to light in 2009-2010 during the early years of the housing crash and economic crisis. Few brokers or lenders informed borrowers of the harsh reality that…
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3 Comments
When I read about HELOCs being superior to HECMs when the money is only needed for a short time, that view does not look long enough into the future. The short-term need demonstrates what could be an indicator of things to come.
While Jack is quite knowledgeable about HECMs, he misses one of the strategies that allows for problematic cash flow ebbs, the Standby HECM (as I call it). A Standby HECM also has value in these situations as well as being able to grow. So while that one event may find a HELOC more cost effective, what happens when that even happens in the future and the senior lacks the income to qualify for another HELOC?
So it is my view that Jack’s view of current short-term needs favoring HELOCs is too myopic. A short-term need may in fact be nothing more than a strong indication that the borrower should be considering a Standby HECM strategy rather than a HELOC.
Lately, I have been stressing the advantages of the HECM LOC to excellent results. More and more financial advisors are seeing the advantage of the HECM LOC. It just makes presenting the HECM to prospective clients that much more persuasive.
Jonathan,
Anecdotal information is interesting but hardly indicative.
It is not HECMs which are gaining interest but rather adjustable rate HECMs which actually have a borrower usable line of credit. We can actually observe that renewed interest in case number assignments before April 27th.
Here is where anecdotes must be questioned. If more interest is being generated in HECMs generally, why are case number assignments for the three month period ended August 31, 2015 so historically terrible? August which had no holidays had the worst total for case numbers assigned for any month of that three month period.
Interest and endorsements are two different things. I have an Oklahoma CFP declare great interest in HECMs only to say that she would never initiate a conversation about HECMs but would be positive about them if questioned by a client. On the west coast, CFPs seem much more interested and even see its value outside of our traditional box of suggestions such as replacing recourse with non-recourse debt.
Yet endorsements are the ultimate test of acceptance. Fiscal 2016 does not seem to be the year that will have the rise needed to declare that it is the year things turned around. So out of necessity we are talking about fiscal 2017 or (most likely) beyond.