A reverse mortgage line of credit (specifically through a Home Equity Conversion Mortgage, or HECM) offers unique features compared to a traditional Home Equity Line of Credit (HELOC). While both allow homeowners to access their equity, the structure, benefits, and safeguards of a HECM line of credit make it a powerful financial tool.

HELOC vs. HECM Line of Credit: Key Differences

A traditional HELOC is typically a short-term loan with a set draw period, often lasting 5-10 years. Homeowners can use the funds as needed, much like a credit card. However, available funds decrease as the balance grows, and lenders can freeze or revoke a HELOC for various reasons, including changes in home value.

A HECM line of credit operates differently, providing distinct advantages.

How the HECM Line of Credit Works:

The HECM line of credit is an option available to borrowers of federally insured reverse mortgages. Here are the main features:

• Access as Needed: Like a HELOC, HECM borrowers can draw funds when needed, and interest is only charged on withdrawn amounts.
• Flexible Payout Options: Borrowers can choose how to access their equity—cash upfront, a line of credit, or a combination of both. For example, if a borrower qualifies for $100,000 after fees, they might take $50,000 as a lump sum and keep $50,000 as a line of credit for future use.

Unique Benefits of a HECM Line of Credit

1. Guaranteed Accessibility: Unlike a HELOC, a HECM line of credit cannot be frozen or canceled due to a decline in home value. This protection is guaranteed by the U.S. Department of Housing and Urban Development (HUD).
2. Growth Over Time: One of the most valuable features of a HECM line of credit is its growth factor. The available credit increases over time at the same rate as the loan’s interest rate plus the annual mortgage insurance premium (MIP). Even if home values drop, the credit line continues to grow.
3. No Monthly Payments Required: Unlike a HELOC, a HECM does not require monthly repayment, providing greater financial flexibility for homeowners.

Mortgage Insurance Premiums (MIP)

Borrowers with HECMs pay mortgage insurance premiums to ensure these loans are federally backed. The upfront MIP is 2% of the home’s appraised value, and the annual MIP is 0.50% of the loan balance. These fees help sustain the loan’s protections, such as the guarantee that the line of credit cannot be canceled.

Should You Choose the Line of Credit Option?

A HECM line of credit is optional but can serve as a valuable financial safety net. With its unique growth structure and guaranteed access, it allows homeowners to leverage their equity while preserving other investments and maintaining financial security.

What About Proprietary Reverse Mortgages?

For proprietary reverse mortgages (non-HECMs), the availability and terms of a line of credit depend on the lender’s structure. Always review the details with your loan officer and consider consulting a financial advisor for guidance on major financial decisions.

If you’re exploring reverse mortgage options and want to learn how a HECM line of credit might fit into your financial strategy, feel free to reach out—I’m here to help!