HECM vs. HELOC: Which Is Better?

If you’re looking to borrow against the equity in your home, two options include a home equity conversion mortgage (HECM) and a home equity line of credit (HELOC). A HECM may be a solid choice if you’re at least 62 years old and on a fixed income, but it comes with more requirements and limitations.

Understanding the pros and cons, eligibility requirements, and how they work could help you assess whether a HECM vs. HELOC may be better for your needs.

HECM vs. HELOC: At a glance

Both HELOCs and HECMs can be structured as lines of credit for flexible access to funds, but that’s about where the similarities end. HELOCs are popular options among all homeowner groups, but HECMs are only available to a specific subset of folks. 

Here are the main differences between an HECM vs. HELOC: 

	HECM	HELOC
Average rate (APR)	7.68%* fixed; 7.45%* adjustable	8.57%**
Age requirement	Must be at least 62 years old	Age of majority in your state of residence
Disbursement	Line of credit, monthly payments, or lump sum	Line of credit, accessible by check, online transfer, or credit card
Equity requirement	Usually need at least 50% equity in your home	Usually need at least 15% equity in your home
Repayment terms	Must be repaid in one balloon payment after you pass away, sell your home, move out, or fall behind on property taxes, maintenance, or homeowners insurance	Monthly interest-only minimum payments during a five- to 10-year draw period, followed by full monthly payments (principal and interest) during a 10- to 20-year repayment period
Costs & fees	Closing costs, interest, origination fees, mortgage insurance	Closing costs, interest, origination fees, annual fees, inactivity fees, and draw fees
Best for	Seniors who need extra retirement income	Borrowers with stable incomes who can afford the monthly payments

What is a HECM?

A HECM is a type of reverse mortgage insured by the Federal Housing Authority (FHA). Other reverse mortgages exist, but HECMs comprise about 85% of the market. They follow specific rules designed to protect you and your heirs while guaranteeing repayment for the lender. 

How it works

A HECM allows you to secure a loan with a lender based on the equity in your home. The lender issues you the loan as a lump sum, a line of credit, or monthly payments.

It’s different from a standard mortgage because you don’t need to make monthly payments. You can use the funds for several purposes, such as daily expenses or home improvement projects. Just like a traditional loan, interest accrues. But you don’t have to pay off the interest until the loan is due—typically when you or your spouse pass away, sell your home, or move out. 

Who is eligible?

You may be eligible for a HECM if you meet these requirements:

1. At least 62 years old
2. The home must be your primary residence
3. The home must be up to date on all major repairs and in good shape
4. Own your home outright or have significant equity (at least 50%)
5. Can afford to cover ongoing expenses, such as homeowners association fees, home insurance, and taxes

You must also meet with a HECM counselor to discuss eligibility requirements, alternative financing options, and how these may affect your finances.

Pros and cons of HECMs

Before taking out a reverse mortgage, consider these risks and benefits.

Pros

• No monthly payments

  This is the most significant benefit for many seniors on a fixed income.

• Choice of funding type

  You can select whether you want all the funds upfront in one lump sum, as monthly payments to bolster your cash flow, or as a line of credit you can use as you need.

• Limits on loan repayment

  It’s true that HECM balances increase over time, but you won’t owe more than your home is worth if you sell it at its market value. Heirs only need to repay 95% of the value to keep the home.

• Streamlines your debt

  If you’re still paying your first mortgage or have federal student loans or other federal debt, you must pay them off before you take out a HECM, but you can use some of the loan funds to do so.

• Non-borrowing spouse protections

  If your spouse wasn’t a co-borrower on the HECM, when the loan becomes due, they can postpone repayment if they meet certain conditions, potentially staying in the house without needing to repay the debt.

• No minimum credit score requirements

  Seniors can qualify for a HECM regardless of credit score, making this an option for many folks.

Cons

• Increasing loan balance

  A HECM is one of the few loans where the balance goes up over time, not down, potentially causing you to be upside-down on your home. You can make payments toward it if you choose, but the longer you wait, the harder it will be to pay off.

• Expensive upfront and ongoing costs

  Lenders generally charge one-time fees, such as closing and origination fees. You’ll also be assessed upfront and ongoing charges for mortgage insurance, which you can choose to roll into your loan balance.

• Your heirs may inherit less

  When you pass away, your heirs must repay the loan in full, or at least 95% of the home’s current value, if your balance is larger than what your home is worth.

• Risk of losing your home

  If you fail to pay your property taxes and homeowners insurance or fall behind on maintenance, the lender can foreclose on your home.

• Moving out triggers repayment

  You may hope to stay in your home indefinitely, but many seniors eventually need to move into a nursing or memory care home—and when that happens, you must repay the loan or sell your home.

• Concerns about non-borrowing spouses

  Your spouse can stay in the home if they’re not a borrower, but only if they meet an extensive list of conditions set into place before you took out the HECM—otherwise, your lender may force them to move out or repay the loan.

What is a HELOC?

A HELOC is a revolving credit product that allows you to borrow against your home’s equity as needed. Like a credit card, HELOCs often come with adjustable interest rates.

How it works

Once approved, you can borrow as needed up to your credit limit during a draw period that normally lasts up to 10 years. 

During this phase, you’re often responsible for making interest-only payments on the amount you borrow, but some lenders may require you to pay a portion of the principal and interest. Then, you enter the repayment period, where you can no longer make withdrawals and must make full principal-and-interest payments.

Who is eligible?

You typically need at least 15% equity in your home to qualify. So, if the current value of your home is $200,000, you need at least $30,000 equity ($200,000 x 15%).

Lenders consider other factors when you apply, such as your credit profile, income, and debt-to-income ratio. The exact requirements vary by lender.

Pros and cons of a HELOC

Here are the risks and downsides of a HELOC.

Pros

• Flexibility

  You can borrow from your line of credit as needed, and you only pay interest on your outstanding balance plus any lender fees, such as annual fees or draw fees.

• Potential to deduct interest on your taxes

  You may be able to deduct interest paid on your HELOC if you use the funds to “build, buy, or substantially improve” your home and choose to itemize deductions rather than taking the standard deduction.

• Lengthy draw period

  Lenders often allow you to borrow from a HELOC for up to 10 years.

• No age requirements for adults

  As long as you’re an adult, you can take out a HELOC without waiting until you’re 62.

Cons

• Foreclosure risk

  A lender can take your home if you don’t repay your loan on time.

• Potential for overspending

  Relying too heavily on HELOC funds to pay for expenses can lead to a cycle of debt similar to credit cards.

• Expensive fees

  HELOCs often come with upfront closing costs and origination fees, which can add a significant amount to your total borrowing costs. Many lenders charge ongoing fees too.

Our expert’s take

Erin Kinkade

CFP®

During your life, you’re not required to repay a HECM. This is a benefit for those who need to remain in their home and don’t want the financial burden of paying on a HELOC, specifically a variable rate if they can’t make payments and face losing their home. If this is a critical concern, I would recommend a HECM—but only after reviewing your entire financial condition and estate plan. Those with sufficient cash flow and a risk tolerance suitable to take out a HELOC—along with other specific details of their financial condition and goals or estate plan—may find this route makes the most sense for them, specifically if they want to pay off the HELOC and not leave debt for their surviving spouse or heirs to deal with.

HELOC vs. HECM: Which is right for you?

The table below lists situations where a HELOC or HECM might be a better fit.

If you’re…	Consider…
Age 62 or over	HELOC or HECM
Younger than age 62	HELOC or another loan product
Living on a fixed income	HECM
Planning to leave your home to an eligible non-borrowing spouse or heirs who can repay the debt	HECM
Planning to leave your home to someone who can’t repay the debt	HELOC
Looking to maintain equity in your home	HELOC
Able to handle fluctuations in your monthly payments	HELOC

You’re at least 62 years old: HECM

A HECM may be a better option if you’re at least 62 years old and need to supplement your retirement income. We recommend speaking with a financial professional to see whether it’s the right decision for your unique financial situation.

Your income is stable enough to afford monthly payments: HELOC

A HELOC could be a better option if you want to maintain equity in your home and can afford the monthly payments. Remember, your payments can increase significantly when you switch to the repayment phase, and changing interest rates over time can also move your payments up or down.

You’re concerned about affording monthly payments: HECM

If you’re worried about making monthly payments, a HECM might be better for you. This option can be a significant relief if you’re on a fixed income or your expenses tend to change. 

You have heirs who can repay the debt or a spouse: HECM

If you want to leave your home for posterity, and they have the ability to repay at least 95% of the home’s value, such as by taking out their own mortgage, a HECM might be a good fit. It may also work better if you’re married and your spouse can ensure they meet the requirements to stay in the home.

You have heirs who can’t repay the debt or an ineligible spouse: HELOC

Making monthly payments is tough for many retirees—but if you can do it and you’re worried about leaving your home to your heirs, a HELOC might be better. 

Alternatives to HECMs and HELOCs

Choosing between a HECM vs. HELOC isn’t the only choice you have to make. Make sure you consider these other options too:

• Personal loan: A lump-sum, unsecured personal loan may charge slightly higher rates and require better credit, but it’s often quicker and cheaper to get—especially if you don’t need a huge sum. 
• Credit counseling: The National Foundation for Credit Counseling maintains a referral service to speak with a live counselor for free to review your finances and identify a plan for addressing financial challenges. Anyone is eligible for a consultation.  
• Home equity loan: With a home equity loan, you can borrow a lump sum. Monthly payments are fixed, and you won’t need to meet upper-age minimums. 
• Veteran assistance: If you’re eligible for VA benefits, especially with a VA home loan, you may be able to access special grants and benefits based on your service. 
• Home improvement grants and loans: Many government agencies offer grants and low-interest loans for eligible seniors, especially for catching up on overdue maintenance or boosting your home’s energy efficiency. 

FAQ

Is a HECM the same as a reverse mortgage?

A HECM is a type of reverse mortgage. The significant difference is that the FHA insures HECMs but not other reverse mortgages.

What happens to a HELOC or HECM if the market crashes?

If the market crashes and your home loses substantial value, a lender can reduce your credit limit or freeze your HELOC account. In contrast, your HECM payments continue during a crash because the federal government guarantees them.

Do you need an appraisal for a HELOC or HECM?

When you take out a HELOC or HECM, lenders generally require an appraisal to assess your home’s current value.

Can you refinance a HELOC or HECM?

It’s possible to refinance a HELOC or HECM. Doing so might make sense if you can qualify for a lower rate.

Can I get a HELOC or HECM with bad credit?

Yes, some HELOC lenders have minimum credit score requirements as low as 620. You can also get an HECM with bad credit. The product has no minimum credit score requirement.