July 12th, 2017
Pitching the benefits of a reverse mortgage over a home equity line of credit has emerged as a major marketing strategy for Home Equity Conversion Mortgage professionals, and now a prominent retirement blogger has added his voice — and some helpful charts — to the mix.
On his Tools for Retirement Planning blog, Tom Davison explores why a HECM line of credit “may be a far better choice for many retirees” than the traditional “forward” line, starting with some familiar facts: the amount of cash available grows over time, regular payments aren’t required, and the lender can’t freeze or cancel the line unless the borrower fails to meet the basic obligations.
While Davison writes that he regularly discussed HELOCs with his clients during his time as a financial advisor — and even maintained one himself as a standby hedge against emergencies — he firmly comes down on the side of the so-called “ReLOC,” which in his telling can stand for either a “reverse” or “retirement” line of credit.
He uses the example of a 63-year-old homeowner who decides to tap into $200,000 of home equity on a $400,000 home. With a “forward” home equity loan, that $200,000 of availability remains steady for the life of the loan, which eventually comes due at the end of a 10-year draw period. Starting at age 73, Davison writes, the borrower must pay $1,212 per month, for a total of $14,544 per year, at an interest rate of 4%.
“With those payments, it would take until the homeowner is 93 years old to pay it off,” Davison notes. “The HELOC repayment works the same way as a traditional mortgage: no draws and can’t skip payments. The HELOC’s flexibility ends when the loan switches from the draw to the repayment period.”
Had the same homeowner selected a HECM line of credit instead, she’d be able to access up to $120,000 during the first year and then the remaining $80,000 starting in the second year of the loan period. But if the borrower does nothing, the major potential advantage begins to appear.
“By the time our homeowner turns 80, if they had not tapped their $200,000 ReLOC, they could withdraw $400,000,” Davison writes. “Or nearly $600,000 at age 90, and $800,000 at age 97.”
He goes on to point out that this growth could end up outpacing a retiree’s investment portfolio depending on the circumstances, and that unlike with a HELOC, repayment isn’t required unless the borrower leaves the house or passes away.
“The homeowner may find making payments very beneficial,” Davison writes, echoing a new “flexible payment” pitch adopted by some reverse mortgage professionals. “A payment both reduces the loan balance and increases the amount that grows and can be borrowed again. More flexibility stems from the fact that the maximum amount owed on the loan is limited to what the house is worth when the homeowners leave it.”
To read Davison’s full post, as well as to check out some visuals illustrating the differences between the two types of loan products, visit Tools for Retirement Planning.
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