Overlooked provision in home equity credit lines confront homeowners and may trigger foreclosure.

By George A. Downey

The popular Home Equity Line of Credit (HELOC) adjustable-rate loans made tapping home equity easy and affordable as they featured low upfront costs and interest-only monthly payments, but there’s a catch.
What’s happening
Unfortunately, the favorable terms that made them appealing change at a “reset date,” usually between five and 10 years. When that occurs, the credit line is closed, and monthly payments are increased to pay the balance off by the maturity date, which can pose challenges for some.

  1. New monthly payments (principal and interest) are based on the record-high surge in interest rates.
  2. The ability to refinance is challenged by more restrictive lending regulations that disqualify borrowers with limited resources.
    Why it matters
    Payment increases, which can be double or triple previous payments, can be a formidable challenge forcing borrowers to draw on savings just to make mortgage payments – clearly, a slippery slope that threatens borrowers’ finances and retirement.
    A Quincy story
    A borrower shared with me the challenging situation they experienced: When their adjustable HELOC rate reset date arrived, their previous monthly payment increased by more than double, threatening their livelihood. They could not qualify for other refinancing options and were nearly in foreclosure with their bank.
    A reverse mortgage became the promising solution for them. They were able to qualify, which helped them pay off their HELOC balance, established a new credit line, protected their savings, and facilitated their desire to age in place.
    Reverse mortgage: A unique solution with additional benefits
    The federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage provides eligible owners 62 and older with the ability to convert a portion of home equity to cash and/or credit to improve cash flow and liquidity. HECM terms are designed for retirement budgets, including paying off current mortgages and liens without the obligation to make future monthly mortgage payments.
    HECM terms and benefits are guaranteed by federal insurance and will not be changed or reduced by any future economic, financial market, or real estate value declines.
    Reverse mortgage overview
  • No monthly mortgage 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 Federal Housing Administration (FHA) insurance.
  • Unlike HELOCs, funds and loan terms are guaranteed. They cannot be frozen or canceled 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.

Eligibility requirements apply. HECM counseling is required. Subject to credit and income approval. You must occupy the residence as your primary home. You must continue to pay for property taxes, insurance payments, homeowners’ association fee, home maintenance costs, and other fees as required. You must have significant cash available for the down payment. The balance of the loan grows over time and interest is charged on the balance. The loan becomes payable when the last borrower on eligible non-borrowing spouse passes away, sells the home, permanently moves out, defaults on taxes, insurance, or maintenance, or otherwise does not comply with the loan terms.
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About the Author: George Downey, CRMP (NMLS ID 10239) is the Regional Senior Vice President of The Federal Savings Bank branch located at 100 Grandview Road, Suite 105, Braintree, MA 02184. Contact Mr. Downey at 781-843-5553 / Cell 617-594-3666 / gdowney@thefederalsavingsbank.com, www.thefederalsavingsbank.com/georgedowney