Please don't misunderstand me.
I like the idea of reverse mortgages if obtained at reasonable cost and rates for a well defined purpose, as I wrote above. They have gotten a somewhat undeserved bad rap, and they've been improved significantly. They're likely superior for a variety of well defined purposes.
But
@bee raised HECMs as a great way to hedge sequence of return risk. For that particular well defined purpose, they may not be the better product. ("Hedge" = "insurance" or "protection".)
Sequence of return risk is the risk that one's decumulation (spend down/retirement) phase may
begin during a market downturn. It's not a risk of ever having a market correction. So a hedge against this risk is protection that's needed during the first few years of retirement. This has a few implications:
1. Sequence of return risk is not concerned with what happens after, say, 10 years. So it doesn't matter that a HELOC only enables you to draw against your line of credit for 10 years. Like term life, that's the period that you're "insuring".
2. Since you're only "insuring" for a relatively short period (say, 1/3 of your anticipated retirement period), the fixed (up front) costs of the line of credit weigh more heavily. They are amortized over just a few years, as contrasted with closing costs on a traditional 30 year mortgage. (They also weigh more heavily because you pay these fees even if you never need to draw upon the line of credit.)
3. The amount of protection you need is capped by your anticipated expenses over the first few years of retirement. So the fact that a reverse mortgage credit line grows doesn't matter. (The fact that it might shrink with a HELOC does matter, however.)
4. Since this "insurance" is needed at the point of retirement, one might be able to apply for the line of credit shortly before retirement, thus making it easier to qualify for a HELOC.
In a sense, the whole question of how easy it is to get a HELOC is irrelevant to the question of which one is better. If you cannot get a HELOC then there is no choice to be made.
Permit a metacomment here: I've been fastidious in citing objective third party sources: the FTC, HUD, the CFPB. Pages from provider products can be informative and accurate, but still incomplete. This is something to watch for not just in this thread, but generally.
The Reverse.Mortgage page purports to be presenting information on reverse mortgages generally. But then it quietly slides into features that apply only to HECMs, such as being federally insured. You have to flip to
another page to find out that this feature costs 2% of the total line of credit up front, plus 0.
5% of the outstanding balance annually.
The comparison chart says that HELOCs become due (balloon payment) after ten years. Some do. But the chart is deceptive here. The
Fed writes: "Many existing HELOCs are structured such that when they reach the end of the draw period, they convert from open-ended, non-amortizing lines of credit to closed-end, amortizing loans."
What is best depends on your intended purpose (including risk tolerance) and the terms (including special features) offered.
