The Power of the HECM Line of Credit
When situations arise that require immediate access to liquid cash to fund elder health care costs, or other emergency needs, the HECM Line of Credit can provide just the right amount of peace-of-mind.
It's true! The Home Equity Conversion Mortgage can be used to create an optional Line of Credit that can be accessed when needed. From a financial planning perspective, a standby line of credit such as this is an important financial tool that can be used to offset untimely requirements to sell investments during a down market.
A common question is “why not utilize a traditional home equity line of credit (HELOC) provided through a local bank?” The simple answer is that the local bank HELOC can be called, cancelled, or decreased at any time should the value of the home decrease and the related loan-to-value rise with regard to the bank's lending criteria. The bank's HELOC loan will also likely require a payback schedule where potential foreclosure may occur if the required monthly payments are not made in accordance with the loan terms.
To further differentiate the two forms of home equity financing,ie., HELOC vs HECM, the HECM Home Equity Line of Credit is a non-recourse loan which does not require any monthly principal or interest mortgage payments and generally does not need to be repaid until such time as the last remaining mortgagor or eligible non-borrowing spouse dies, moves away, or sells the property. Additionally, the HECM line of credit can actually grow to enable access to additional funds which can be borrowed over time.
Although the HELOC may have minimal closing costs, when compared to industry-standard settlement charges associated with the HECM, it is commonly recognized that the advantages of the Home Equity Conversion Mortgage outweigh the associated loan closing costs. In other words, one may be relieved to know that the costs of "doing it" may bring many more advantages to the borrower than the costs associated with "not doing it".
Consider the difference between Net Worth and Available Wealth. While Net Worth is meaningful in the sense of dipslaying financial capacity, it does not reflect the availability of such assets. The use of Available Wealth, meaning the access to liquid assets, can be a significant offset to potential losses that originate from a forced sale of investments and equities to cover emergency cash requirements for elder healthcare and other needs.
Which is Better? Net Worth
or Available Wealth?
You must be 62 years of age or older and:
- Own the property outright or have a small mortgage balance
- Occupy the property as your principal residence
- Meet the guidelines of the HECM Financial Assessment analysis. Not be delinquent on any federal debt
- Participate in a consumer information session given by an approved HECM counselor
- Single family home or 1-4 unit home with one unit occupied by the borrower
- U.S. Department of Housing and Urban Development (HUD) approved condominium
- Manufactured home that meets FHA requirements