Harvesting cash for the golden years: To HECM or to HELOC?Atare Agbamu, CRMSHELOC, HECM, reverse mortgages Peter Forward, an industry colleague in the Twin Cities, called me recently to inquire about a reverse mortgage for his mother. "My mother needs a reverse mortgage, and 'Laura' at 'Gopher Country Mortgage' says I should talk to you," he said. I reviewed the basics of the program with him, collected some data about his mother's needs, and suggested that he make an appointment for his mother to meet with a reverse mortgage counselor. I advised him to accompany his mother when meeting the counselor. Approximately two weeks after our initial conversation, I followed up with a phone call to find out whether his mother had received the required counseling. He said that the counseling had been done, but he decided against a reverse mortgage for his mother because of the "high cost" and the amount of equity she could pull out. Instead, he confidently told me, "I put her in a home equity line of credit (HELOC) where she can access more equity and pay 'less cost.'" The reverse mortgage product, in this case, is the government-insured Home Equity Conversion Mortgage (HECM). Every HECM originator, sooner rather than later, will encounter a Peter Forward. A Peter Forward is a mortgage professional or trusted financial advisor to a potential reverse mortgage borrower. Peter Forwards have a superficial grasp of these unique home loans, yet they are in a position to influence reverse borrowers' decisions for better or worse. Peter's decision for his mother raised an important question that we will address in this article: On a value-cost basis, how does a HECM compare with a HELOC? Both HECMs and HELOCs are revolving financial tools for squeezing cash out of a home. To secure the cash stream, a lender puts a lien on the house; the borrower retains full ownership and possession rights. HECMs were created for borrowers 62 years and older; HELOCs were designed for borrowers of all ages who can meet standard credit and income qualifications. HECMs are government-insured loans with capped variable interest rates; HELOCs are private-sector products with uncapped and capped adjustable interest rates. With HECMs, a borrower's other assets are safe from the lender's reach in case the lender lends more than the equity in the property; with HELOCs, a borrower has no such protection. Except for minimal credit checks for federal loan defaults, no income or credit is needed to qualify for HECMs, and no monthly repayment is needed; to qualify for HELOCs, borrowers must pass credit, income and monthly repayment-ability tests. With HECMs, the unused portions of the credit line grows larger every month according to a unique formula; unused portion of HELOCs remain stagnant, subject to the cash-corroding impact of inflation. Failure to make monthly payments is not an issue with HECMs because there are no monthly payments to make; with HELOCs, however, missed payments can result in default and foreclosure. As part of a system of built-in protection for elders, HECMs require free consumer education from a HUD-approved reverse mortgage counselor before an application can become effective; HELOCs have no such built-in safeguards for a vulnerable segment of the population. Indeed, HECMs total costs drop lower and lower after five years; no such claim can be made for HELOCs. There is no question that HELOCs are valuable loan products with very low initial costs for borrowers with strong income, good credit and financial savvy. However, it is clear from the foregoing HECM-HELOC comparison that HELOCs are not suitable for cash-strapped seniors who cannot afford to lose their homes. Also, HECMs are not for every senior. For seniors who plan to sell and move on or who have other means of generating retirement funds for short-term use, there may be less expensive (and probably more risky) alternatives in forward mortgage lending. Peter Forward's mother is in her late 70s with probably more than 15 years left and a long-term need for cash. In my opinion, Peter made the classic penny-wise, dollar-foolish decision choosing a HELOC instead of a HECM for his mother. As informed reverse mortgage originators, we must continue to stress the incomparable value of HECMs and other reverse mortgage programs to our forward-thinking colleagues...Let's think forward on reverse! Atare E. Agbamu, CRMS, is a reverse mortgage specialist and director of training at Inver Grove Heights, Minn.-based Credo Mortgage. Atare's reverse mortgage interviews have been webcast on Mortgage Mag Live!, and he currently serves on the boards of Little BrothersFriends of the Elderly in the Twin Cities and nationally. He can be reached by phone at (651) 389-1105 or e-mail [email protected].
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