Reverse Mortgage Loan (HECM) vs Home Equity Line of Credit (HELOC): What Retirees Need to Know

For many homeowners, the question isn’t whether to tap into home equity - it’s how to do it wisely. Two common options are a Home Equity Conversion Mortgage (HECM), also known as the FHA-insured reverse mortgage loan, and a Home Equity Line of Credit (HELOC). While they may sound similar, the way they function - and the role they play in retirement planning - is very different.

1. Repayment Obligations

Reverse Mortgage Loan (HECM): With a reverse mortgage loan, no monthly principal and interest payments are required as long as you live in the home, maintain it, and stay current on property taxes and insurance. Repayment typically happens when the borrower sells the home, moves out permanently, or passes away.

HELOC: A home equity line of credit requires monthly payments as soon as you borrow against the line of credit. Payments usually include both interest and principal after an initial “draw” period. This can create cash-flow strain, particularly for retirees on fixed incomes.

2. Access to Funds

Reverse Mortgage Loan (HECM): Borrowers can choose how they receive funds: lump sum, monthly payments, a line of credit, or a combination. Importantly, the unused portion of a reverse mortgage line of credit grows over time, providing more borrowing power in the future. Furthermore, the HECM line of credit, once established, is NOT affected by the value of the home. If the value of a property drops, the borrower maintains access to the full line of credit.

HELOC: Funds can be drawn during the HELOC’s draw period (often 5–10 years), but the available balance doesn’t grow. Once the draw period ends, the loan converts to repayment mode, which increases the required monthly payments.

The HELOC can be affected by the value of the home. If equity in the home shrinks due to market conditions, the lender can reduce or freeze the HELOC, leaving the borrower without an option.

3. Interest Treatment

Reverse Mortgage Loan (HECM): Interest accrues over the life of the loan and is

added to the balance. There is no requirement to make payments at any time, however, the borrower has the option to do so. Similar to the HELOC, the interest may be tax deductible if the funds are used for qualified home expenses and the borrower itemizes deductions.*

HELOC: Interest must be paid monthly during the repayment phase. As with the HECM, the interest may be tax deductible if the funds are used for qualified home expenses and the borrower itemizes deductions.*

*Always consult your tax preparer to review and confirm.

4. Risk and Security

Reverse Mortgage Loan (HECM): HECMs are federally insured and come with

consumer protections, including a non-recourse feature. That means you, or your heirs, will never owe more than the home’s value when the loan is repaid.

HELOC: HELOCs are not federally insured, and repayment is the borrower’s

responsibility regardless of changes in home value. If housing prices drop or financial circumstances change, borrowers remain liable for the full balance.

5. Suitability

Reverse Mortgage Loan (HECM): Designed specifically for homeowners age 62 and older, a reverse mortgage loan can provide reliable income, long-term flexibility, and peace of mind in retirement.

HELOC: Best suited for younger homeowners or those with higher cash flow who can comfortably make monthly payments and want a shorter-term borrowing option.

The Bottom Line

Both HECMs and HELOCs allow you to access your home equity - but the way they align with retirement planning differs significantly. A reverse mortgage loan can provide stability and flexibility for retirees, while a HELOC can be a useful tool for those prepared to manage monthly payments and shorter repayment timelines.

Before choosing, it’s important to consult with a qualified mortgage professional and your financial advisor to ensure the option you select aligns with your goals, cash flow, and long-term financial strategy.