Reverse Mortgage Information: Reverse Mortgage or Home Equity Loan?

Which is better for senior homeowners, HELOC or HECM Saver?

I’m certain I have a biased opinion but wanted to catch your attention.  Here are some of my thoughts on the matter.

I’ve heard that most financial advisors will suggest to a senior that a home equity line is a better option for them than a reverse mortgage.  I think that’s because they believe the upfront costs on a reverse mortgage are just too high.  Now, with the HECM Saver program, a reverse mortgage may be an option.

Some comparisons follow…

FEES

• Traditional Home Equity Lines often have very low or even zero upfront costs, depending upon creditworthiness and loan to values you can often find a great deal.
• The HECM Saver will have some upfront fees including Upfront MIP (.01% of the lending limit or home value, whichever is less).  On a $600,000 home you would find the upfront MIP Premium to be $60. You can expect escrow, title, recording, appraisal, and other fees as well and they can all be financed into the loan.

CREDIT SCORE

• You must “qualify” for a Traditional HELOC.  The lender will look at your credit history and evaluate your ability to repay the loan. Minimum credit scores are required.
• HECM Saver has no minimum credit score requirement, but all owners must be over 62 years of age and live in the property.  Borrowers are required to complete a HECM Counseling session with a HUD approved counselor prior to applying for the HECM Saver loan.

REPAYMENT

• With a traditional HELOC you will be required to make at least interest payments on any amounts advanced.  There may also be annual fees.  At some point (usually 10 to 15 years) credit will no longer be advanced and the borrower must refinance.  VERY IMPORTANT TO CHECK THE TERMS OF YOUR LOAN AGREEMENT ON THIS ONE!
• With a HECM Saver, there are no required payments of interest or principal.  The loan is not required to be paid off until the last remaining borrower no longer lives in the home.

LOAN AMOUNTS

• Traditional HELOCs will determine the loan amount based upon home value, credit score and your income.  
• A HECM Saver will loan an amount based upon a formula derived from the youngest borrowers age, the expected interest rate, and the home value or lending limit.

I’d love to hear the opinions of any financial experts who chance to read this article, what do you think of FHA’s newest HECM Saver as an alternative to a traditional home equity loan?