Reverse Mortgage vs HELOC in California

Quick Comparison: Reverse Mortgage and HELOC Side by Side

The table gives a first look. The sections after it explain each row.

What a Reverse Mortgage Is and How It Works

A reverse mortgage is a loan against a home's equity that the borrower does not repay month by month. The Consumer Financial Protection Bureau explains that title stays in the homeowner's name and that borrowers make no monthly mortgage payments. It also states that "interest and fees are added to the loan balance each month and the balance grows."

The most common type, according to the CFPB, is the Home Equity Conversion Mortgage, or HECM. HUD describes the HECM as the only reverse mortgage insured by the federal government. It is available only through an FHA-approved lender.

Age. Under 24 C.F.R. § 206.33, "the youngest borrower shall be 62 years of age or older at the time of loan closing." The statute, 12 U.S.C. § 1715z-20(b)(1) and (d)(2)(A), sets 62 or "such higher age as the Secretary may prescribe."

Home. Under 24 C.F.R. § 206.39, the property must be the principal residence of each borrower at closing, and of any Eligible Non-Borrowing Spouse.

Ongoing duties. The CFPB states that borrowers must pay property taxes and homeowners insurance, use the home as a principal residence, and keep it in good condition.

When it comes due. The loan comes due when the last borrower dies, sells, or moves out. The full rules appear later on this page.

Nonrecourse. Under 12 U.S.C. § 1715z-20(d)(7), the homeowner is not liable for any shortfall between the debt and what the lender recovers from the net sale proceeds or from FHA insurance benefits.

Payment methods. The borrower picks from the methods listed in 12 U.S.C. § 1715z-20(d)(9). These are a line of credit, monthly payments for a set term, a term with a line of credit, monthly payments for as long as the borrower lives in the home ("tenure"), tenure with a line of credit, or any other basis HUD considers appropriate. Under (d)(10), the borrower may generally switch methods later, though HUD may limit this for fixed-rate loans.

A reverse mortgage line of credit is one of these choices. The California reverse mortgage guide walks through the whole process.

What a HELOC Is and How It Works

A HELOC is a revolving line of credit secured by the home. "Revolving" means the borrower can draw, repay, and draw again. The CFPB compares it to a credit card, except that the borrowing is against home equity. If a first mortgage already exists, the HELOC is a second mortgage, paid in addition to the first.

A HELOC has two phases. The Federal Trade Commission explains that during the draw period, the borrower may only have to pay interest. In the repayment period, no more money can be drawn, and the balance must be repaid, either all at once or over time. If the line is not repaid as agreed, the FTC states, "your lender can foreclose on your home."

The lender sets the standards for approval, based on income, credit, and available equity. No minimum age applies. The CFPB notes that HELOCs usually carry a variable interest rate, so payments may change from month to month. It also notes that a lender might freeze the line if the home's value drops significantly or the borrower's finances change.

Federal rules set some limits. Under 12 C.F.R. § 1026.40(f), a lender may change the rate only on a public index outside its control. It may generally end the plan early and demand the full balance only for one of these reasons:

• fraud or material misrepresentation by the borrower
• missed repayment terms
• action or inaction that harms the lender's security
• certain federal rules for loans to a bank's own executive officers

No counseling is required for a HELOC. While required payments are made, the balance does not grow on its own.

Key Differences Between a Reverse Mortgage and a HELOC

The deepest difference is the direction the balance moves.

Balance. With a HELOC, the balance falls as payments are made. With a HECM, interest and charges are added, so the amount owed grows, while the borrower keeps paying taxes, insurance and upkeep and living in the home. The FTC warns this "can use up much – or even all ─ of your equity."

Qualifying. A HELOC turns on proof that the borrower can make payments. A HECM turns on age, the home, counseling, and "any additional requirements prescribed by the Secretary" under 12 U.S.C. § 1715z-20(d)(2)(D).

Costs. Both carry costs. A HELOC may have fees and minimums, and the CFPB suggests asking the lender about them. For a HECM, the CFPB's cost page lists counseling, an origination fee, an initial mortgage insurance premium paid to FHA, interest, and an annual premium equal to 0.5% of the outstanding balance. Federal rules limit the origination fee, and the lender discloses it. For HECMs with FHA case numbers assigned on or after October 2, 2017, HUD's Mortgagee Letter 2017-12 set the initial premium at 2.00% of the maximum claim amount. The CFPB adds that a reverse mortgage is typically more expensive than other home loans.

Lien. A HECM must be a first mortgage under 12 U.S.C. § 1715z-20(b)(3). Because of that, an existing mortgage is generally paid off when the HECM begins. A HELOC usually sits behind a first mortgage.

The home later. With a HECM, the heirs or the estate repay the loan when it comes due, often by paying it off or by selling the house. Nonrecourse protection limits the debt to what the home brings. A HELOC must be repaid on its own terms, whatever happens to the borrower.

A third category. A home equity investment is a shared-equity arrangement, not a loan. An investor pays a sum now in exchange for a share of the home's future value. It works differently from both. The reverse mortgage vs HELOC comparison and the comparison with a home equity loan cover the loan options more closely.

For a household on a fixed income, the direction the balance moves is the difference that shapes everything else.

When a Reverse Mortgage May Fit Your Situation

The household in this section is usually stretched month to month but has years of equity in the house. A HECM tends to fit when the following are true:

• Age and home. The youngest borrower is 62 or older, and the home is the principal residence.
• Tight income. A fixed income would make a new monthly loan payment hard to keep up.
• An existing mortgage. The homeowner wants to remove that monthly payment. Because a HECM is a first mortgage, the existing loan is generally paid off, subject to the loan's terms. Taxes, insurance and upkeep remain the borrower's job.
• Staying put. The homeowner plans to stay in the home for the long term.
• Clear expectations. The homeowner accepts that the balance will grow, and that the loan comes due when the last borrower dies, sells, or moves out.
• Ready for counseling. The homeowner is ready to complete HUD-approved counseling and to wait out California's seven-day period.

A HECM fits less well where taxes and insurance would be hard to keep current. It also fits less well where leaving the house to heirs free and clear matters most, or where a move is likely within a few years. Those are the costs it trades for having no monthly loan payment.

When a HELOC Tends to Fit

The picture here is different: steady income and a need with an end date. A HELOC tends to fit when the following are true:

• Reliable income. The homeowner can carry monthly payments, including if the variable rate rises.
• A short-term need. The money is for a defined cost, such as a roof repair or a home improvement, rather than ongoing cash flow.
• Under 62. The homeowner is younger than 62, or does not meet HECM rules.
• Flexible borrowing. The homeowner wants to draw and repay repeatedly during the draw period.
• Meets the lender's standards. The homeowner's credit and income meet what the lender requires.
• Understands the risk. The homeowner knows that the home is collateral and that missed payments can lead to foreclosure.

A HELOC can be hard to reach on a fixed income that a lender judges too small to support payments. It can also change after it opens. The lender may freeze the line in situations the CFPB describes, including a significant drop in home value or a change in finances. For a couple who will need cash for many years, the move from interest-only payments to full repayment is a point to plan around.

California Rules That Apply to Both Options

California law adds steps before a reverse mortgage. Here is what they mean in practice.

A plain-language notice. Under Civil Code section 1923.5, a lender may not take an application until the applicant has received a notice in 16-point type or larger. The notice says a reverse mortgage "is a complex financial transaction" and that counseling with an independent counselor is required. The applicant also receives a worksheet guide to bring to counseling.

A list of counselors. Under Civil Code section 1923.2(j), before accepting a final application, the lender must give the borrower a list of at least 10 HUD-approved counseling agencies.

A seven-day wait. Under Civil Code section 1923.2(k), a lender may not accept a final application or charge fees until seven days have passed since counseling, and only after receiving a signed counseling certification.

No required annuity. Section 1923.2(i) bars requiring an annuity purchase to get a reverse mortgage.

Absences from the home. Section 1923.2(g) states that absences of up to 60 consecutive days do not make the loan due. Longer absences of less than a year also do not, if the borrower has taken steps to secure the home in a way the lender approves, as the loan documents specify.

Federal due-date rules. For a HECM, 24 C.F.R. § 206.27(c) makes the loan due when a borrower dies and the home is not the principal residence of a surviving borrower. It also becomes due when the last borrower with title conveys the home. Due status is deferred for an Eligible Non-Borrowing Spouse who meets HUD's rules.

With HUD's approval, the loan may also come due in these cases:

• the home stops being any borrower's principal residence
• a borrower is away more than 12 consecutive months for illness, with no other borrower living there
• property charges go unpaid
• another obligation under the mortgage is not performed

Finding a counselor. HUD lists a counselor roster and the number (800) 569-4287. The CFPB connects callers to HUD-approved housing counseling agencies at (855) 411-2372. This includes callers from Los Angeles County to the Bay Area.

Other matters. California property tax relief programs exist, and the county assessor or tax collector publishes current details. What a lender may recover after a HELOC foreclosure is fact-specific under California law, and a California attorney can say how it applies.