HECM vs HELOC, Compared

As a homeowner, chances are you’ve worked hard to build equity in your property — and if you’re facing a big purchase or unexpected financial need, it may make sense to convert that wealth into cash. But there are a variety of ways to go about it, each with its own benefits and drawbacks. In this article, we’ll walk you through the differences between a home equity conversion mortgage (HECM) and a home equity line of credit (HELOC) so you can determine which, if either, is right for you.

Note: SoFi doesn’t offer HECMs. However, SoFi does offer home equity loan options.

What Is an HECM?

An HECM is a type of reverse mortgage that allows homeowners aged 62 or over to take out a lump sum against the value of their home. (There are other types of reverse mortgages on the market that may be available to younger applicants, but these are privately offered and not backed by the Department of Housing and Urban Development, as HECMs are. There’s also such a thing as an HECM for purchase, which helps those 62 and over finance a principal home.)

For some seniors, HECMs are especially attractive because the loan and its interest don’t need to be repaid until the last surviving borrower permanently vacates or sells the home (or dies). While there are usually upfront fees involved, for some borrowers, this arrangement can feel like free money.

However, because interest is building over time and not being repaid, HECMs can eat into the equity you’ve built in your home, which may be less than ideal if you’re planning to pass it on to an heir as an asset. Along with receiving a less valuable investment, your heirs will also be on the hook to pay the loan in full upon your death or otherwise surrender the title to the lender.

Related: Home Equity Conversion (HECM) vs. Reverse Mortgage

What Is a HELOC?

A HELOC loan works differently from an HECM. A HELOC is kind of like a secured credit card, except it’s secured with your home’s equity. In some cases, it may come with a card — or a checkbook — attached to the account.

A HELOC allows you to borrow money against the value of your home, but it doesn’t require you to take one large lump sum. Instead, you can borrow what you need through the HELOC’s draw period and then repay it during the repayment period that follows. This arrangement may help you borrow less overall, which could mean paying less for the loan by way of interest. Some HELOC users borrow and repay money repeatedly during the draw period.

However, a HELOC is still a loan, and it still comes with costs. Some HELOCs allow you to make interest-only payments during the draw period. However, once the principal comes due during the repayment period, the monthly payments will be much larger. (For help figuring out what your monthly payments could look like, check out this HELOC monthly repayment calculator.)

Recommended: What Is a Home Equity Line of Credit (HELOC)?

Key Differences

While HECMs and HELOCs are similar in some ways, there are important differences that set them apart and may help you determine which is best suited to your needs.

Borrower Age Requirements

HECMs are only available to homeowners aged 62 and over.

HELOCs, meanwhile, don’t have any borrower age requirements — but they do have minimum equity requirements, and the lender will also check out your credit score and proof of income to qualify you for the loan. (Your credit history and other financial information will be part of the lending qualification decision for both HELOCs and HECMs.)

Collateral Requirements

Both HECMs and HELOCs are secured by your home, and you’ll need to have built up home equity in order to have value to borrow against.

Every lender has different specific requirements, but for a HELOC, you’ll generally need to own at least 15% or 20% of your home’s value. For an HECM, you’ll usually need to own a substantially greater portion of your home: 50% is a general rule of thumb, but some lenders may require you to have even more equity than that.

Repayment Requirements

As discussed above, there are substantial differences in HECM vs. HELOC repayment policies.

HECMs have upfront costs, but the loan principal and interest don’t come due until after the last surviving borrower sells the property, permanently moves out of the home, or dies.

HELOCs are split into a draw period and a repayment period. During the draw period, when you can borrow against your home’s value, you may be able to make interest-only payments. Both the principal and interest will come due in the repayment period. The draw period is often 10 years long, and the repayment period may be another 10 or even 20 years.

Pros of an HECM

Here are some of the benefits of a reverse mortgage:

• •   They offer money up front with no interest until later: If you’re planning to live in your home until you die — and don’t necessarily want to pass the property on to heirs — an HECM can provide an additional income stream that doesn’t require repayment during your lifetime.
• •   HECM funds aren’t taxable: Because money you borrow with an HECM isn’t considered income, you don’t owe income taxes on it.

Cons of an HECM

And now, some HECM drawbacks:

• •   You’ll decrease your home’s equity as a personal investment: Because an HECM is borrowed against your equity and repayments don’t begin until after you move out or die, it can decrease the amount of money you or your family could earn when selling your property later on.
• •   You’ll still have to pay upfront fees: Even if you see HECM funds as “free money,” origination fees and other upfront costs can still add up to a sizable amount.
• •   Your home could be foreclosed if you fail to make other payments: Property taxes, homeowners association fees, and homeowners insurance premiums will all still be due regularly, and if you don’t pay them, your HECM lender could take possession of your home.
• •   Your heirs may face a challenging decision: If you don’t repay your HECM during your lifetime, your heirs will either have to repay the loan in full or surrender the property to the lender — and they’ll be forced to make that decision fairly soon after your death, as the transaction typically needs to happen within one to six months.

Pros of a HELOC

Here are the best reasons to consider a HELOC when comparing an HECM vs. a HELOC:

• •   You’ll have lower interest rates than other forms of credit: Because a HELOC is secured by your home, it may offer lower interest rates than comparable types of loans, such as unsecured credit cards.
• •   You can borrow only what you need: HELOCs allow you to flexibly borrow only what you need during the draw period, rather than taking out a lump sum.
• •   You can file for a possible tax deduction: HELOC interest may be tax-deductible if you’re using the funds you borrow to make improvements on your home. Please consult your tax advisor.

Cons of a HELOC

There are drawbacks to HELOCs to be aware of:

• •   Their interest rates change: Most HELOCs have variable interest rates, which means your monthly payment can be unpredictable as market conditions change.
• •   They decrease your equity: Like any loan taken against your home’s value, a HELOC can decrease the amount of equity you own, which in turn decreases the value of your home investment (until the loan is repaid).
• •   You may be at risk of foreclosure: If you fail to make your HELOC payments, the lender can foreclose on your home (even if you’re still making payments on your primary home mortgage loan).

HELOC vs HECM: Which Option Is Better?

In the end, only you can determine which of these loans makes the most sense for your personal situation or if it would be better to find another way entirely to meet your financial needs. Both HELOCs and HECMs put your home on the line and decrease the equity you’ve worked hard to build in your property.

If you’re aged 62 and over and are eligible to apply for an HECM — and you don’t plan on leaving your home to heirs — a reverse mortgage could offer access to cash without many costs in the short term.

If you’re looking for a more flexible way to borrow against your home equity, a HELOC may help you convert your home value to cash at a lower interest rate than other types of loans. However, variable interest rates can make payments unpredictable, and if you choose interest-only payments during the draw period, you may be stuck with much higher bills later on when repayment comes due.

The Takeaway

HELOCs and HECMs can help you use the value you’ve built in your home to your advantage by converting some of it to cash in the short term. However, both are forms of debt, so costs and risks are involved. One major advantage of HELOCs is that anyone with sufficient equity in their home can apply for a HELOC, whereas HECMs are only for those aged 62 and over.

SoFi offers flexible HELOCs. Our HELOC options allow you to access up to 85% of your home’s value, or $350,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi.

FAQ

What are the differences between HELOC and HECM?

A home equity conversion mortgage (HECM) is a type of reverse mortgage that’s available solely to homeowners aged 62 and over. With an HECM, the principal and interest payments don’t become due until the borrower moves out of the home or passes away, which can make them attractive for some seniors (but challenging for those hoping to pass on the home to heirs). A home equity line of credit, meanwhile, is a more flexible line of credit that allows you to borrow money as needed, up to the maximum amount you qualify for, against your home’s equity.

What are the downsides of an HECM loan?

Home equity conversion mortgages lower the equity you own on your home, and since interest and principal are building up unpaid over time, the value of your ownership can decrease dramatically over the course of the loan’s lifetime. Also, the entire sum of the loan becomes due when the last surviving borrower vacates the home or passes away, which means your heirs will need to pay up or forfeit the property to the lender.

Is there an age requirement for a HELOC?

Unlike home equity conversion mortgages, home equity lines of credit don’t have age requirements. However, your lender will still assess your creditworthiness, and there are also minimum equity requirements to ensure you own enough of your home’s value to borrow against.

---

Photo credit: iStock/VioletaStoimenova

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHE-Q126-082