Too many seniors are living on a fixed income that barely covers the essentials. Nearly 20 percent of married retirees (and nearly 50 percent of unmarried retirees) rely on Social Security for the bulk of their income. Moreover, today ten to twelve thousand Baby Boomers are retiring every day, and that trend will continue to 2030. Retirement experts predict we are on the brink of a national emergency.
Numerous surveys have consistently shown the great majority of seniors have expressed a strong preference to remain in their homes, and “age in place.” How will they accomplish this when most exist on limited incomes and savings. The answer may lie in the utilization of accumulated home equity. Short of selling the home, their options are limited. Most people opt for one of the following:
- Borrow money through a traditional (forward) mortgage or a home equity line of credit (HELOC).
- Tap into their home equity via a reverse mortgage. The dominant reverse mortgage (95%+) nationally is the HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage. The HECM reverse mortgage was created by Congress in 1988 to enable senior homeowners (62 and older), who want to remain in their homes, the ability to convert a portion of their home equity to cash to enhance retirement security. The terms and provisions are unique designed to accomodate the needs and circumstances of retirees.
Although HECMs offer distinct advantages for seniors over HELOCs, industry records reveal HELOCs are selected 9 out of 10 times over HECMs. Why? Here’s an overview:
- Lack of Knowledge
Homeowners—especially seniors—are familiar with and understand traditional (forward) mortgages. HELOCs have long been an easy way to tap home equity and typically require minimum payments of interest only. HECMs, on the other hand, are not well understood and are generally viewed in a negative or questionable light. Many consumers view them as being more expensive, complicated, difficult to get, and promoted by self-serving lenders. In fact, earlier versions of the HECM had flaws that contributed to the reputation. However, HUD/FHA and the industry have made major changes to the HECM program’s provisions, pricing, and consumer protections that corrected earlier shortfalls.
- Misconceptions and Myths
Misunderstandings about reverse mortgages are prevalent and, unfortunately, serve to discourage examination at the outset. Common misconceptions include:
- The lender takes ownership of the house.
- Nothing will be left for the kids.
- A reverse mortgage should only be used as a last resort.
These statements simply aren’t true, and yet they have deterred many families from exploring the HECM option.
- Uninformed Advisors
Most seniors have established long and trusted relationships with their bank or other advisors; they typically look to these experts first for advice and recommendations. Most banks aggressively promote their in-house HELOC program, don’t offer HECMs, and are not well informed on reverse mortgage terms and benefits. At the same time, well-intended friends and family members are equally uninformed, but don’t realize it. Consequently, they commonly default to recommending a HELOC, which is a more familiar solution.
Reverse Mortgage vs. HELOC: Making an Important Decision
Making the right choice between a HELOC and an HECM reverse mortgage is considerably more important than most realize. The right decision requires understanding of the senior’s individual needs and circumstances, as well as fulfilling their near and longer term objectives. Too frequently, conclusions are reached without adequate information, or with advice from others who may not be qualified.
Both programs have their place and—like most things in life—have pros and cons, costs, and responsibilities. The following chart compares some of the main points that distinguish HECMs from HELOCs. Understanding the differences is the key to the right decision.
The new realization that home equity wealth can and should be a part of retirement planning is challenging the “old school” way of thinking. And for many senior homeowners, the HECM program is a smart solution. However, reverse mortgages should always be evaluated alongside other options—including the sale of one’s home to downsize or relocate.