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, according to these basic facts about Social Security. And with ten to twelve thousand Baby Boomers retiring every day, experts predict we are on the cusp of a national emergency.
Meanwhile, the great majority of seniors express a strong preference to remain in their homes, and “age in place.” How can they afford this goal on a fixed income? Short of selling the home, their options are limited. Most people opt for one of the following:
- Borrow money through a traditional home equity line of credit (HELOC).
- Tap into their home equity via a reverse mortgage. Not all reverse mortgages are HUD/FHA insured Home Equity Conversion Mortgages (HECMs), but since HECM is the dominant reverse mortgage program (utilized over 95 percent of the time), it’s the option we want to highlight in this comparison. NOTE: HECMs are the only reverse mortgage program currently approved in Massachusetts.
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 offer a low or no-cost option that provides ready access to funds when needed. HELOCs are easy to obtain; they require minimum, interest-only monthly payments. HECMs, on the other hand, are not well understood and 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.
- 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 versed on reverse mortgage benefits for seniors. At the same time, friends and other advisors are equally uninformed about reverse mortgages. Many 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 people realize. The right decision requires thoughtful considerations of individual needs and circumstances, as well as integration with 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. Explore both to determine which option is the best choice to supplement your fixed income.
Conclusion
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.
Reverse Mortgage Advice and the Five-Year Rule
