Unprecedented increases can surprise and potentially threaten senior homeowners

By George A. Downey

Home Equity Lines of Credit (HELOCs) and other adjustable-rate mortgages recently experienced record-setting payment increases due to spiking interest rates. Most severely affected are senior homeowners living on fixed incomes.

HELOC terms potentially threaten financial security

The overwhelming popularity of home equity lines of credit, providing access to home equity, have repayment terms and obligations that may have been overlooked, including:

1. Withdrawals are permitted for a limited period; 2. Minimum interest-only payments are usually allowed during the initial period; 3. At the end of the initial period, no further withdrawals are permitted and payments are increased to repay the balance by the maturity date; and 4. If the borrower is unable to comply with the repayment obligations, the home is subject to foreclosure proceedings.

The surprise post-pandemic rate and payment increases are catching many borrowers unaware and unprepared. Attempts to refinance have been hindered by more restrictive lending policies that disqualify borrowers, especially those in retirement with limited financial and credit qualifications.

Reverse Mortgage: A unique potential solution with helpful benefits

The federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage enables homeowners age 62 and older to convert a portion of home equity to cash in order to age-in-place with potential to increase financial security. HECM terms are uniquely created to accommodate retirement budgets, including assisting to pay off current mortgage balances without ongoing monthly payment obligations.

Depending on individual facts and circumstances and if all borrower requirements are met, a reverse mortgage may be a solution to pay off current mortgages, property charges, and other debt, as well as possibly gaining access to additional cash or a growing line of credit. 

The loan terms and amounts are guaranteed by the Department of Housing and Urban Development/Federal Housing Administration insurance and will not be changed by any future economic, financial market, or real estate value declines. Thus, the loan terms are protected for the life of the loan.

Education is key. Learn everything – the pros, cons, and how each works; the truth about rumors, and how to determine your eligibility and suitability. If it appears to work for you, know why. If not, why not? 

Reverse Mortgage Overview

• No monthly payment obligations: Voluntary payments are permitted but not required.

• Credit line growth: The undrawn balance of the credit line grows (compounds monthly) at the same rate charged on funds borrowed providing more funds for future needs.

• No maturity date: Repayment not required until no borrower resides in the property.

• Non-recourse loan: No personal liability for borrowers or heirs.

• Repayment of loan balance may never exceed the property value at the time of repayment. 100% of surplus goes to owners or heirs. Any deficiency is paid by FHA insurance.

• Unlike HELOCs, funds and loan terms are guaranteed; cannot be frozen or cancelled if the loan is in good standing.

• Borrower obligations to keep loan in good standing are limited to:

• Keeping real estate taxes, homeowner’s insurance, and property charges current

• Providing basic home maintenance

• Continue occupancy as primary residence.

To learn more, contact the author with questions or request a no-obligation discussion.