[Plinker]

HELOC vs REVERSE MORTGAGE

The Case For HELOC First and RM Later (only if necessary):

Reverse Home valued at $300K, no mortgage, no other debt
Example#1: No draw and payoff RM in 5 years
All fees to close including PMI = $12K
Available funds $150K - $12K = $138K (but no draw)
Appreciation of home or increase in available funds moot
Leave home due to extended nursing care, etc. in 5 years and
payoff Is the original $12K in fees
To say that the RM fees were covered by available loan
amount in 2+ years is meaningless as the borrower
left the home after 5 years
Result: Borrower paid $12K and received no value. If home
valued at $500K then add $4K as PMI is 2%. Now the
payoff is $16K

HELOC: Fees at or near ZERO. Borrower paid nothing.

Winner: HELOC


Reverse. Same as above but immediate $50K draw and payoff in 5
Example#2: years
Available remaining draw $88K ($138K - $50K draw)
No further draws so increased value of home and available
funds moot
$50K with interest at 3.5% for 5 years = $9K in Interest
Nursing home, etc as above in 5 years and payoff of RM is
$71K ($50K draw + $12K fees + 9K Interest)
5 year cost to borrow $50K is $21K ($12K fees +$9K interest)
If you borrowed $50K from a bank and paid it off in 5 years,
APR would be 8.4%!!! (50K x .084 X 5 years = $21K). Who
would pay 8.4% in this rate environment?

HELOC: Current rate (BofA) 2.5%
No fees
$50K draw, interest after 5 years = $6.5K
Payoff after 5 years = $56.5K or a savings of $14.5K over RM
Will only require monthly payments of $104/mo (interest only)

Winner: HELOC
*** Unless monthly payment of $104 (interest only) is too high for borrower*** When principle of HELOC comes due in 10 years, simply get another HELOC. Remember, you may not even be in the home for 10 more years. If, over time, borrower needs more cash or unable to qualify for another HELOC, then can downsize, sell to heirs and rent back or secure a RM. Borrower will be older and home value likely higher (win/win).

Does it not make more financial sense to begin with a HELOC and then switch to a reverse mortgage ONLY if you begin to experience severe financial distress? Imagine how much more RM money you would qualify for by waiting years as your home will have appreciated AND you are older when you apply. You will be far more ahead than just what the RM available loan amount has increased. Is it not possible that you may never encounter “what if” situations and would have then saved the high cost of a RM altogether? Or, if you do, the “what ifs ” may be small enough that the homeowner may be able to pay it off over a short period of time with a HELOC. So, who cares if it takes 60 to 90 days to secure a RM? You have the HELOC to tide you over for that short period of time. Why sign up for a very expensive product you may never need for “what if” issues that may never materialize?
There are several highly esteemed financial scholars whom I hold in high regard that have suggested a RM, but ONLY after consulting a fiduciary financial planner, to protect against negative sequence of return risks (SRR) early in retirement. They make an excellent point. However, a potential RM borrower may not experience so severe of a negative SRR that it could not be addressed with a HELOC and then payed back at much lower rates. Or, if SRR is particularly onerous, then consider a reverse mortgage.
It appears that a RM is still best utilized as a loan of last resort as they were originally intended such that the borrower does not exit the loan early and incur exorbitantly high costs and interest but instead stays in the home the remainder of their life.