HELOC vs HECM Comparision

Feature Comparison -
Home Equity Line of Credit (HELOC) Loans vs Home Equity Conversion Mortgage
(HECM) Loan

FEATURE HELOC HECM
Closing Costs and Fees Low
– usually under $500 – sometimes zero closing costs		 High – as much as 15%
of amount borrowed
-origination fee Yes – often waived Up to $2,000
-appraisal fee Yes – often waived Yes
-insurance premium No 2%
upfront plus 0.5 percent charged monthly on outstanding loan balance
-loan servicing fee No Yes
     
Age Qualification None Homeowner must be at
least 62
Income Qualification Yes
– lender must verify ability to make monthly payments		 None
Market Size Huge
Market – according to Standard & Poor’s, more than 12 million loans
originated just in the third quarter of 2005		 Small
but Growing Market – According to HUD, more than 43,000 HECM loans were
originated during the 12-month period ended 9/30/2005
Lender Availability and Competition Widespread
– most banks, credit unions and similar financial institutions offer this
product. Strong competition on rates, terms, fees and other loan features.		 Limited
– lenders are screened and approved by HUD.
Most significant loan terms (rate, fees, etc) are set by law or
regulation. Limited competition in some fee areas.
Typical Equity Position of Borrower Usually
substantial 1st mortgage balance outstanding, low to moderate equity position
in home		 Usually
zero or low 1st mortgage balance outstanding, large equity position in home
Mortgage Type Forward
– loan balance declines and home equity grows as monthly payments are made to
lender.		 Reverse
– loan balance grows and home equity declines as monthly payments are made to
homeowner.
Payment Flow Homeowner makes
monthly payments to lender		 Lender makes monthly
payments to homeowner
Interest Rate on Loan Variable Variable
Interest Rate Index Prime Rate One-Year Treasury
Rate
Interest Rate Margin Varies by lender – strong
competition 		Set
by federal regulation: monthly adjustable loan – 1.5% added to 1-year
treasury rate; annually adjustable loan – 3.1% added to 1-year treasury rate.
Interest Rate Cap Varies by lender – strong
competition 		Lifetime
cap set by federal regulation: monthly adjustable loan – 10% above initial
rate; annually adjustable loan – 5% above rate.
Loan security Secured
by home equity, typically in second position behind primary mortgage		 Secured
by home equity, must be primary mortgage
Worst Case If
loan amount exceeds value of home (due to market downturn, etc), borrower may
be personally liable.		 Borrower
can never owe more than the market value of home, even if loan amount exceeds
this value. (Non-recourse loan)
Maximum Possible Loan Amount Varies
by lender – strong competition – some aggressive lenders may loan 100% or
more of home’s equity. More typically,
LTV is 80%		 Market
value of home or FHA 203b limit for county where home is located
Factors That Determine Actual Loan
Size		 1)
LTV – loan to value ratio, 2) homeowners’ income and ability to service
monthly loan payments		 1)
age of homeowner; 2) value of home, 3)
HUD 203b limits
Required Counseling Prior to Getting
Loan?		 Yes No
Tax Issues:    

Interest Deductible?		 Yes, generally – on
balances up to $100,000		 Yes
– but of limited value since interest is paid when loan is due (death or sale
of home)

Loan Proceeds Taxable Income?		 No No
Loan Disbursement Options Line of Credit -
Borrower Draws Funds as Needed		 Multiple
Options: lump-sum at closing, line of credit, regular monthly payments (for
fixed term or life annuity), or a combination of these.