Unlocking Home Equity: HECMs vs. HELOCs vs. Home Equity Investments
For most homeowners age 62 and older, home equity represents the largest portion of their net worth, often exceeding the value of their retirement savings and other assets. Home equity is simply the difference between your home’s value and any outstanding mortgage balance.
While having substantial home equity can be a positive financial position, that wealth is generally illiquid. Unless the home is sold or the equity is accessed, it may provide little practical value in helping fund retirement expenses, emergencies, or other financial goals.
As a result, many retirees explore ways to convert a portion of their home equity into accessible cash without selling or giving up ownership of their home. One common approach is to borrow against the home’s value.
Three home-equity-access options available today are the Home Equity Conversion Mortgage (HECM), the Home Equity Line of Credit (HELOC), and Home Equity Investments (HEIs), also known as home equity sharing agreements.
Each uses the home as collateral and allows homeowners to access cash for virtually any purpose. However, they operate differently and can have significantly different costs, risks, and long-term implications.
This guide explores the differences between these options to help you make a more informed decision about how best to leverage your home’s value.
HECM vs. HELOC vs. HEI: Compare at a Glance
| Feature | HECM (Reverse Mortgage) | HELOC*** | HEI (Home Equity Investment)*** |
| Payout Options | Lump sum, monthly payments, line of credit, or combination | Revolving line of credit | Lump sum |
| Age Eligibility | Homeowners age 62+ | No age restriction | No age restriction |
| Interest Charges | Yes, added to loan balance | Yes, typically variable rate | No traditional interest |
| Risk Adjustment / Equity Share | None | None | Typically 2–30% of home value |
| Pays Off Existing Mortgage | Yes (if applicable) | No | No |
| Minimum Equity (Approx.) | 50% | Varies by lender | 20–25% |
| Income Qualification | Financial assessment required | Income and credit qualification required | Generally less stringent |
| Repayment Method | Repay loan balance, typical via sale of home (borrower or heirs can never owe more than the home’s value when sold to repay the loan)* | Repay principal and interest through required monthly payments | Repay a share of future home value/appreciation |
| Monthly Payments | No required principal and interest payments (borrower remains responsible for property taxes, insurance, maintenance, and any HOA dues) | Required monthly interest and/or principal payments | No payment to HEI provider, but existing mortgage payments continue |
| Term | Typically as long as borrower lives in the home and meets loan obligations | Fixed draw and repayment periods | Agreed-upon term (often 10–30 years) or upon sale of home |
| Future Home Appreciation | Homeowner retains all future appreciation (subject to satisfying the loan balance when due) | Homeowner retains all future appreciation | Investor shares in future appreciation |
| Consumer Protections | Federally insured, regulated, counseling required | Traditional lending regulations | Limited regulation; no counseling requirement |
HECM: A Time-Tested, Regulated Reverse Mortgage
A Home Equity Conversion Mortgage (HECM) is a federally insured reverse mortgage designed for homeowners age 62 or older. It converts a portion of your home’s equity into cash through a lump sum, monthly payments, a line of credit, or a combination of these options—without requiring monthly mortgage payments. (Borrowers remain responsible for property taxes, homeowners insurance, and home maintenance.)
If an existing mortgage is in place, HECM proceeds are first used to pay off that loan—effectively converting a required monthly mortgage payment into an optional one. Any remaining proceeds are available to the homeowner.
Interest and mortgage insurance premiums are added to the loan balance, which generally increases over time while repayment is deferred. Voluntary prepayments are permitted at any time without penalty. The loan typically becomes due when the last surviving borrower permanently leaves the home, passes away, or fails to meet loan obligations.
Backed by the U.S. Department of Housing and Urban Development (HUD), HECM consumer protections include:
• Mandatory third-party counseling to help ensure borrowers understand the product
• Transparent disclosures and standardized requirements
• A non-recourse feature: you or your heirs will never owe more than the home’s value when the loan is repaid**
HECMs have been available for more than 35 years and are commonly used to help older homeowners age in place, supplement retirement income, improve cash flow, or help cover healthcare and long-term care expenses.
To qualify, borrowers must generally be at least 62 years old, have sufficient home equity, and demonstrate the ability and willingness to meet ongoing property-related obligations.
The line of credit option is the most popular HECM payout option for several reasons, including:
1. Access to the Line of Credit Cannot Be Frozen or Reduced Due to Market Conditions
Unlike HELOCs, a HECM line of credit remains available regardless of fluctuations in home values, credit markets, or economic conditions. As long as the borrower complies with the loan terms established at closing, access to the available line of credit is guaranteed.
2. Lifetime Access to Available Funds
As long as the loan remains in good standing, borrowers have access to their HECM line of credit throughout their time in the home. This differs from traditional HELOCs, which typically have draw periods of five to ten years. Once a HELOC draw period ends, borrowers can no longer access funds and must begin repaying both principal and interest.
3. The Available Line of Credit Can Grow Over Time
Unlike a HELOC, the available borrowing capacity increases as the unused portion of the HECM line of credit grows at the same compounding rate as the loan balance. As a result, borrowing capacity may increase substantially over time.
For example, assuming an initial line of credit of $200,000, a 6.75% effective growth rate, and no withdrawals:
• Initial Line of Credit: $200,000
• In 5 Years: $287,070
• In 10 Years: $412,056
• In 20 Years: $848,911
Illustrative example only. Actual line-of-credit growth will vary based on the effective rate applicable to the loan.
HELOCs: A Familiar Home Equity Option That Requires Monthly Payments
A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home. Like a HECM and an HEI, it allows homeowners to access a portion of their home equity without selling the property. Funds can generally be used for any purpose, including home improvements, debt consolidation, emergencies, or supplemental cash flow.
Unlike a HECM, however, a HELOC requires monthly payments. During the draw period (often the first 5 to 10 years), borrowers are typically required to make interest-only payments, followed by principal-and-interest payments during the repayment period. Failure to make required payments may result in default or foreclosure.
HELOCs often feature variable interest rates, meaning monthly payments can increase if interest rates rise. Borrowers must also qualify based on income, credit history, debt-to-income ratios, and other underwriting requirements.
For homeowners with strong cash flow and the ability to comfortably manage monthly payments, a HELOC can be an effective way to access home equity. However, for retirees living on fixed incomes, required monthly payments and the potential for payment increases may present challenges.
HELOCs are widely available through banks, credit unions, and mortgage lenders. Qualification requirements, loan amounts, fees, repayment terms, and interest rates vary by lender.
HEIs: Promising Simplicity, Delivering Complexity
Home Equity Investments (HEIs)—also known as home equity sharing agreements—allow homeowners to access a lump sum of cash in exchange for a share of their home’s future value. Repayment is typically due in a single lump sum at the end of an agreed-upon term (often 10 to 30 years) or when the home is sold.
Unlike a HECM, HEIs generally do not require borrowers to pay off an existing mortgage. As a result, homeowners remain responsible for any ongoing mortgage payments.
While HEIs do not charge interest in the traditional sense, homeowners agree to share a portion of their home’s future appreciation. Depending on market conditions, the amount ultimately repaid may be significantly greater than the amount initially received.
The concept can sound appealing: no monthly payments and no interest charges. However, repayment is tied to future home value, and in some scenarios homeowners may repay substantially more than the amount originally received.
In addition, homeowners who invest in renovations and improvements may not receive the full benefit of any resulting increase in value because a portion of that appreciation may be owed to the investment company.
Unlike HECMs, HEIs are not federally insured and generally do not require independent third-party counseling. Concerns have been raised about:
• Complex contract language
• Potentially confusing repayment structures
• Reports of aggressive or misleading marketing practices
• Regulatory and legal scrutiny in multiple states
HEIs are generally available through specialized financial technology and real estate companies, not traditional banks, to homeowners with at least 20%–25% equity. They may accept lower credit scores than traditional lending products. Most require an appraisal and may charge origination fees, appraisal fees, inspection fees, title fees, escrow costs, and other closing-related expenses.***
Hypothetical Repayment / Loan Balance Scenarios After 10 Years
For consistency, each scenario assumes the home is worth $600,000 at loan origination and $1.2 million after 10 years. For the line-of-credit examples (HECM and HELOC), it is assumed that half of the available line is drawn at closing and no additional draws are made during the 10-year period.
HEI Repayment — 10-Year Term***
Your home is worth $600,000. You receive $60,000 from an HEI provider in exchange for a 10% stake in your home, with a 10% risk adjustment rate.
In 10 years, your home is worth $1,200,000. At that point, you owe:
• The $60,000 original investment
• 10% of the $600,000 appreciation = $60,000
• An additional $60,000 for the 10% risk adjustment
Total repayment due: $180,000
HELOC Repayment — Monthly Payments Required***
Your home is worth $600,000. You obtain a $276,000 HELOC with a 7.5% variable interest rate and draw half of the available line ($138,000) at closing. No additional draws are made.***
During the 10-year draw period, you make the required monthly payments. Assuming interest-only payments during the draw period, you would pay approximately:
• $862.50 per month in interest payments ($103,500 over 10 years)***
At the end of 10 years, your home is worth $1,200,000 and:
• You have paid approximately $103,500 in interest
• You still owe the original $138,000 principal balance (assuming no principal reduction)
• The remaining unused line of credit does not grow and may no longer be available once the draw period ends
• Depending on the loan terms, repayment may convert to principal-and-interest payments
Total paid after 10 years: Approximately $103,500 in interest payments.
Now at the end of the draw period, the borrower enters the repayment phase and still owes the original $138,000 principal balance, which must be repaid—along with additional interest—through monthly principal-and-interest payments over the remaining loan term. The unused $138,000 line of credit did not grow and may no longer be available once the draw period ends.
HECM Line of Credit Repayment — No Set Due Date
Let’s assume the same housing appreciation scenario. Your home is worth $600,000. You establish a HECM line of credit with $276,000 in available principal and draw half of the available funds ($138,000) at closing. No additional draws are made.*
In 10 years, your home is worth $1,200,000. At that point, you do not have to repay the loan if you are still living in the home and meeting your loan obligations. Repayment is deferred—not forgiven—and generally occurs when the home is sold or a maturity event occurs.*
• Initial draw: $138,000
• Assuming a 7.5% effective rate (interest rate plus mortgage insurance premium) and no voluntary prepayments, the loan balance (assuming closing costs were rolled into loan) grows to approximately $329,000
• The unused line of credit continues to grow over time, increasing future borrowing capacity
• After the initial draw, the remaining unused line of credit has grown from $138,000 to approximately $281,000
• The loan is not currently due and payable
• You may continue living in the home and defer repayment until a maturity event occurs (e.g., the last surviving borrower moves out or passes away)
• The sale of the home always satisfies the loan, even if the loan balance exceeds the home’s value*
Total paid after 10 years: $0. Current repayment obligation: $0. Line of credit $281,000.
Bottom Line: Know What You’re Signing Up For
HECMs, HELOCs, and HEIs can all provide access to home equity, but they work very differently.
Before tapping your home equity, make sure you:
• Seek third-party advice or counseling
• Understand how and when repayment is due
• Consider whether ongoing monthly payments fit your retirement budget
• Know what portion of future appreciation, if any, you may be giving up
• Compare all available options, including HECMs, HELOCs, home equity loans, and HEIs
Because each option carries different costs, risks, repayment requirements, and tradeoffs, homeowners should carefully evaluate which solution best aligns with their financial goals and retirement plans.
The best solution depends on your goals, cash-flow needs, home equity, age, and overall financial situation.
Let’s Start a Conversation!
Fairway’s retirement mortgage specialists can walk you through your options, answer your questions, and help you protect your equity and your future.
* The actual reverse mortgage available funds are based on current interest rates, current charges associated with loan, borrower date of birth (or non-borrowing spouse, if applicable), the property sales price and standard closing cost. Interest rates and loan fees are subject to change without notice.
**There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
***This is an educational example of a HEI and a HELOC. Requirements, payment, and other terms may vary between lenders and investors.