The Home Equity Conversion Mortgage (HECM) or modern reverse mortgage is sometimes referred to as a "HELOC on steroids" because it shares many features with the Home Equity Line of Credit. In this video, we'll breakdown the differences between both loan programs and discuss how each might fit a given scenario.

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Advantages of a HECM compared to a HELOC and a HEL
1. A HECM offers flexible repayment options.
With a HECM, the borrower can significantly increase their cash flow — not only from the loan proceeds they receive (e.g., a lump sum disbursement at closing or by drawing available proceeds as needed from a line of credit) — but also from the flexible options they have to repay the borrowed money. The borrower can repay as much or as a little toward the loan balance each month as they want, or they can choose to make no monthly mortgage payment at all. Of course, they still must maintain the home and pay property taxes and homeowners insurance.

The loan balance doesn’t have to be repaid until the last remaining borrower moves out or passes away and is typically satisfied through the sale of the home. If the borrower’s heirs want to purchase the home, they can by paying 95% of the appraised value or paying off the loan balance, whichever is less. They can also choose to refinance the home into their name or simply walk away (in which case the home is usually sold on the open market).

With a HELOC, the borrower can draw funds as needed from the available credit line and is typically required to make monthly payments on just the interest that is accrued for a set number of years (e.g., the first 10 years) during what is called the draw period. For borrowers who are aged 62+, the burden of required monthly payments can diminish cash flow during a phase of their life when income tends to be fixed or dwindling.

After the draw period, the HELOC transitions into the repayment period for a set number of years (e.g., 20 years), during which both principal and interest payments are required. This can result in the borrower experiencing payment shock, as required payments can be significantly higher during the repayment period, which can further restrict a senior borrower’s cash flow for the duration of retirement.

With a HEL, the borrower receives a one-time lump sum disbursement of the loan proceeds at closing. The interest rate and monthly payments are fixed for the duration of the loan — typically five to 20 years. Monthly payments toward the loan balance are required, which, like with a HELOC, can reduce a senior borrower’s cash flow throughout retirement.

2. The unused portion of the HECM credit line grows over time.
With a HECM line of credit, as long as the borrower does not fully draw the HECM loan, the unused portion of the credit line grows at the same compounding interest rate as the loan balance (independent of swings in the value of the home) — giving the borrower access to even more funds over time. For this reason, it can be valuable to establish the HECM line of credit sooner rather than later.

4. The HECM borrower (or their heirs) can never owe more than the home is worth at the time of loan maturity.*
A HECM is a non-recourse loan insured by Federal Housing Administration (FHA). Non-recourse means even if the loan balance exceeds what the home is worth when the loan is due, the sale of the home will satisfy the loan and neither the borrower nor their heirs will not be responsible for paying the difference. Note: If the home value is greater than the loan balance at the time of loan maturity, the borrower (or their heirs) would keep any remaining proceeds after the loan is paid off.

A HELOC and a HEL are generally not considered non-recourse loans and offer no such protections from the FHA.

Chapters
00:00 Introduction
01:17 How is a HELOC different?
02:29 How Long will you be in the home?
03:25 Other Subtle Differences
04:05 Protections of the HECM
05:11 What's the Strategy?

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