LTC Bullet:  On Using Home Equity for LTC 

Tuesday, March 21, 2006 

Las Vegas, NV-- 

LTC Comment:  Should consumers take the Wall Street Journal's advice and use home equity lines of credit (HELOCs) or utilize home equity conversion mortgages (HECMs) instead?  More after the ***news.*** [omitted]


The following article was first published in The Mortgage Press, April 2006.  It is reprinted with permission.  For the record, LTC Bullets does not share the authorís positive opinion of Mr. Clements's WSJ column, where he often gives highly questionable advice about long-term care planning. 


"What the Wall Street Journal Failed to Tell Readers about HELOCs vs. HECMs" by Atare E. Agbamu, CRMS. 

One of my favorite columns in the business world's preeminent daily business newspaper is "Getting Going" by Jonathan Clements.  Mr. Clements dispenses generic personal finance advice.  He is one of the best in the business.  

In a piece titled "Five Strategies for Helping Your Parents -- And Getting More From Their Estate" (WSJ, January 18, 2006, page D1), Mr. Clements gave some advice on home equity lines of credit (HELOCs) versus reverse mortgages (HECMs) that illustrates the dangers of giving and taking generic financial advice from otherwise very good financial generalists.  In strategy #4, 'Taking Credit,' here is Mr. Clements's sage advice: 

"Later in retirement, if the parents start running short of money, they might be tempted to tap into their home's value through a reverse mortgage.  But these loans, which usually don't have to be repaid until after the parents die, can involve closing costs of as much as $20,000. 

"To avoid that eye-popping expense and preserve money for their children, the parents could opt instead for a home equity line of credit, which will also allow them to borrow against their home's value, but should cost little or nothing to set up.  There is, however, risk involved.  Unlike a reverse mortgage, the parents will have to make regular repayments on the credit line during their lifetime. 

"They could keep up those repayments for a bunch of years, simply by drawing down the credit line even further.  But eventually, the credit line might be tapped out -- and the parents could find themselves in a nasty cash crunch. 

"Sounds scary?  Maybe, if it gets to that point, the children could commit to making the minimum payments on the credit line." 

To his credit, Mr. Clements mentioned the risk of a cash crunch.  The cash squeeze comes from the monthly repayment obligation of a HELOC.  In addition to their monthly cash draw for living expenses, the repayment obligation will compel Mr. Clements's HELOC borrowers to use principal to pay principal.  With variable interest rates on HELOCs, this "strategy" can quickly liquidate the borrower's home equity.  Home equity conversion mortgages or HECMs (a.k.a. Reverse Mortgages) have no repayment requirements for as long as the borrowers live in their home. 

So, for "little or nothing to set up," those who follow the Wall Street Journal's "strategy" could end up not only rapidly running through their home equity, but also confiscating extra cash from their children to pay the lender.  Let's take a moment to review some relevant questions: 

* What happens if the kids are unable to make the "minimum" payments for their parents?    

* What is the cost of the "minimum" payments to the kids?   

* What if the parents live for twenty-five more years?  

* Why should the kids commit to transferring "minimum" payments to a lender when they could be using those "minimum" payments to shore up their own retirement portfolios?   

* Why should the kids follow a "strategy" that guarantees loss of their inheritance while putting their parents on the streets? 

If the Wall Street Journal were some provincial business paper and Jonathan Clements were an upstart financial columnist, I would not bother to write this response.  The Wall Street Journal is the king of business dailies, and Mr. Clements is a respected and influential columnist.  I personally enjoy reading his fine column.  But I believe his strategy #4 is ill-advised and could hurt those who follow it.  Here are my reasons: 

Reason # 1 - Monthly Repayments:  

The HECM borrower has no monthly repayments to make; the HELOC borrower must make monthly repayments.  If they fail to make payments, they lose their home, their shelter, and their place. 

Reason # 2 - Non-Recourse Home Loans: 

HECMs and all reverse mortgages are non-recourse loans.  The parents' children and heirs are not liable for repayment.  The lender is legally forbidden from looking beyond the property to recoup any loss it may suffer in a reverse mortgage transaction.  Can you put a dollar sign on the value of this protection for an older adult?  The HELOC loan does not offer this vital protection.  If the home securing the HELOC falls in value below the cash the lender advances the parents, the parents could lose more than their home. 

Reason # 3 - Asset Protection: 

HECMs and reverse mortgages guarantee borrowers against losing their homes even if they exhaust their available equity, provided they pay their property taxes and homeowners insurance.  HELOCs do not offer similar structural legal guarantee. 

Reason # 4 - Consumer Education: 

HECMs and reverse mortgages mandate consumer education from trained and certified reverse mortgage counselors before a borrower can get a reverse mortgage.  HELOC borrowers are on their own on a decision that could cost them their home. 

Reason # 5 - Little Cost to Zero Cost Reverse Mortgages: 

Not all reverse mortgages come with an "eye-popping" entry fee.  There are proprietary reverse mortgages with little to zero set up fee.  HELOCs have "little" set up fee. 

Reason # 6 - Full Disclosure: 

HECM and reverse mortgage lenders are required to make "Total Annual Loan Cost" or TALC disclosure over the projected life of the loan.  In its rigor, the TALC disclosure has no parallel in the world of HELOCs and traditional forward mortgages.  All costs, including servicing costs for the life of a reverse mortgage must be disclosed to the borrower.  HELOCs hide servicing costs in the interest rates.  The ubiquitous "APR" does not tell the entire story on HELOCs's hidden costs. 

Reason # 7 - Lower Long-Term Costs: 

It is a fact that the longer you keep a HECM loan, the lower the total annual loan cost (TALC).  With HELOCs, the opposite is true.  For folks already "running short of money," qualifying for HELOCs could be tough because they must show lender that they have sufficient income to pay back.  While lack of income may not prevent them from getting a HELOC loan today because of availability of "Stated Income" or "No Income/No Documentation" programs, it would exact a heavy price:  higher interest rates relative to tamed HECM rates.  So, for "little or nothing to set up," Mr. Clements's HELOC borrowers could be saddled with higher interest rates (costs), higher monthly repayments (headaches), faster depletion of their home equity (heartburns), quicker march into default and foreclosure (mortal terror in a season of respite).   

Yes, HECMs and some reverse mortgages can be "expensive" to set up.  And it is tempting to focus on the costs and ignore the incomparable benefits.  The real question should be:  for the right borrower, is it worth it?  On a cost-value basis, my money is on HECMs and reverse mortgages. 

Think reverse. Move forward! 

About the author:  Atare E. Agbamu, CRMS, is President of ThinkReverse LLC in Oakdale, Minnesota. ThinkReverse LLC helps mortgage originators address demographic change through reverse mortgage training and consulting.  Besides marketing, originating, and researching reverse mortgages, Mr. Agbamu has authored over 50 articles on reverse mortgages through his nationally distributed column in The Mortgage Press.  His book, Think Reverse! (a guide to marketing and originating reverse mortgages for mortgage professionals and older financial advisors) will be  published by The Mortgage Press, Ltd. in June.  He can be reached at (612) 203-9434 or