There are differences between an HECM line of credit and a traditional home equity line of credit (HELOC). In general terms, a HELOC requires you to pay monthly interest payments, the loan value doesn’t grow, the loan account could be closed by the lending institution and it may have a pre-payment penalty not insured by FHA.
In contrast, The HECM equity line of credit has no required monthly payments, permits the unused line of credit to increase annually, the line of credit stays open as long as the borrower occupies the home and fulfills the loan requirements, it has no pre-payment penalty and it’s backed by the Federal Housing Administration (FHA). Watch the interview with popular platform speaker, author and leading authority on Home Equity Conversion Programs, Don Graves, as he introduces the reverse mortgage purchase option.
As you can see, there are distinct advantages to a HECM line of credit. While most seniors will use it for a retirement cash reserve for necessities, some may open a HECM line of credit as a hedge against the future. In some strategic scenarios, retirees age 62+ may design a combination of the HECM line of credit and the reverse mortgage purchase to eliminate mortgage payments and maintain a line of credit at the same time. The skillful use of this combination strategy can deliver significant flexibility in retirement planning.
One popular strategy is to delay taking Social Security to age 70 to maximize its lifetime benefits and use the HECM line of credit to live on during the period preceding age 70. You can elect to pay it back or not. It’s completely at your discretion. Having a line of credit as a financial back stop can really come in handy if your retirement income situation suddenly turns negative. It can bring some psychological solace and confidence to know there’s a cash reserve option as quick as writing a check.