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Home Equity Personal Finance

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, but a HELOC may be a better option if you’re unsure how much you need to borrow.

Understanding the pros and cons, eligibility requirements, and how they work could help you assess which may be better for your needs.

In this guide:

HECM vs. HELOC: At a glance

The table below lists the major differences between a HECM and a HELOC.

HECMHELOC
Rates*8.99%* (fixed rates)

7.10%* (adjustable rates)
10.04%*
Age requirementMust be at least 62 years oldAge of majority in your state of residence
DisbursementLine of credit, monthly payments, or lump sumCheck, online transfer, or credit card
Equity requirementYou often need at least 50% equity in your homeUsually need at least 15% equity in your home
Repayment termsGenerally repaid after you die or sell your home5 – 30 years
Costs/feesClosing costs, origination fees, and maintenance feesClosing costs, origination fees, and service fees
Best forSeniors who need extra retirement incomeBorrowers with stable income who can afford the monthly payments

*Average rate in November 2023

What is a HECM?

A HECM is a type of reverse mortgage insured by the Federal Housing Authority (FHA). 

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 or sell your home. 

Who is eligible?

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

  • At least 62 years old
  • Own your home outright or have significant equity (at least 50%)
  • Not delinquent on any federal debt
  • Can afford to cover ongoing expenses, such as homeowners association fees, home insurance, and taxes

You also must meet with a HECM counselor to go over eligibility requirements, alternative financing options and how it may impact your finances.

Below are the pros and cons of a HECM.

Pros

  • No minimum credit score requirement. 

    You could qualify with poor credit.

  • Unlike a traditional mortgage, you don’t need to make monthly payments on a HECM.

  • It provides a way to stay in your home. 

    If you can no longer afford to pay your mortgage but can afford to pay ongoing expenses, such as property taxes, a HECM can provide a way to keep your home. 

Cons

  • Upfront costs. 

    Lenders generally charge one-time fees, such as closing and origination fees.

  • 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.

  • Risk of losing your home. 

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

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.

Here are the advantages and disadvantages to consider before using a HELOC.

Pros

  • Flexibility. 

    You can borrow from your line of credit as needed, and you only pay interest on your outstanding balance.

  • 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 borrowing period. 

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

Cons

  • Foreclosure risk. 

    If you don’t repay your loan on time, a lender can take your home.

  • Potential for overspending. 

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

  • Fees

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

Our expert’s take

Erin Kinkade

CFP®

During your life, you’re not required to repay the 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, and specifically a variable rate, in the event they’re unable to make payments and face losing their home. If this is a critical concern, I would recommend a HECM—but only after reviewing the client’s 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.

Consider a HELOC if… Consider a HECM if…
You’re not sure the exact amount you needYou’re at least 62 years old
Your income is stable enough to afford monthly paymentsYou want to supplement your retirement income
You’re looking for a shorter-term solutionYou’re concerned about affording monthly payments

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. That said, we recommend speaking with a financial professional to see whether it’s the right decision for your unique financial situation.

How might your decision affect your heirs?

Erin Kinkade

CFP®

It depends on your estate plan or intentions of leaving a legacy. Communication with the executor of your estate or family members this could affect could help make the decision of a HELOC vs. HECM. If cash flow is an issue, a HECM may be the best route to go. The homeowners would benefit to have a life insurance analysis done to make sure the policy could cover the remaining debt owed on the home. I would recommend this for a HELOC if the homeowner is 62 or older. The main differences between the two are the lump sum versus drawing what is needed and repayment requirements during your lifetime. Ultimately, if the the owner or their spouse passes away with a remaining debt owed, regardless of which type of loan they took out, both must be repaid from the deceased’s estate or the proceeds if the home is sold.

You’re not sure the exact amount you need: HELOC

Because you can borrow against your home equity as needed, a HELOC might be a better choice if you need funds to cover an ongoing project with uncertain costs, such as a home renovation project.

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.

You want to supplement your retirement income: HECM

If you’re a retiree who needs additional income, a HECM may be a better solution. The product is designed to help senior citizens boost their retirement income.

You’re looking for a short-term solution to cover emergencies: HELOC

If you’re looking to borrow money for a one-time emergency expense, a HELOC might be a better option. You can borrow only what you need and repay it over a short period.

You’re concerned about affording monthly payments: HECM

If you’re worried about making monthly payments, a HECM might be the better path for you. This option can be a significant relief if you’re on a fixed income or have fluctuating expenses. 

FAQ

Is a HECM the same as a reverse mortgage?

A HECM is a type of reverse mortgage. The significant difference is that a HECM is insured by the FHA, but other reverse mortgages are not.

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 so they can assess the current value of your home.

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. And you can get a HECM with bad credit. The product has no minimum credit score requirement.