Reverse Mortgage a Better Option Compared to HELOC for Seniors

According to a new piece published at financial news website The Street, some homeowners who were looking to unlock the equity in their home found the home equity line of credit (HELOC) to be beneficial, there are other homeowners who are qualifying seniors who are looking to remain in their home while accessing that equity in a different way swears by the choice of a reverse mortgage.

George Padula, chief investment officer at Modera Wealth Management to The Street said that according to him HELOCs is a useful ‘break-glass-in-case-of-emergency” source of funds.  HELOC is a loan that needs to be paid back. 

HELOCs have their own benefits; you just need to be careful and aware.

A prospective senior client should consider the pros and cons when thinking about getting a HELOC which is a variable rate; most HELOCs only allow a borrower to pay monthly interest; one needs to know that the interest paid on a HELOC is not always tax-deductible, and the lending institution can abruptly cancel its HELOC program.

Matt Stephens, a financial planner at The Street said that retired clients are always recommended to have at least six months’ worth of expenses set aside in cash for emergencies. 

Just because you have a HELOC, it doesn’t count as your ‘emergency fund.’ 

Matt added that banks canceled HELOCs in 2008 with housing prices dropping, resulting in people no longer having access to them at the moment when they needed them.

According to the financial planner with Cameron Downing financial and investment management in Miami, Fla, Glenn Downing, in such situations a reverse mortgage can potentially be more beneficial for a senior compared to a HELOC. 

Because like any other loan,  HELOCs need to be repaid, Downing told The Street. 

Taking out a HELOC with an interest-only loan creates a new cash outflow month on month. 

Though there is enough equity to meet the cash shortfall for a period of time, once it has been used up, the borrower will be in a worse position than before the loan Downing adds.

Shelley Giordano, co-founder of the Academy for Home Equity in Financial Planning at the University of Illinois Urbana-Champaign explained that a reverse mortgage, unlike a HELOC, cannot be canceled at the whim of the institution.

she explained to The Street, the homeowner has full access to the HECM Line of Credit even if the property values drop. 

Even if a HELOC costs less to set up, but it lacks the consumer safeguard and borrowing assurances provided by the FHA Home Equity Conversion Line of Credit.