Lurking payment increases can shock HELOC borrowers

By George A. Downey

A standard, but long-forgotten, term in Home Equity Lines of Credit (HELOCs) is the reset provision. Traditional HELOCs feature attractive terms including low or no upfront costs and minimum interest-only payments for a set period, commonly 10 years. At that time (the reset date), the terms change: (1) the credit line is closed to future withdrawals, and (2) the monthly payment is increased to repay the balance by the maturity date.
Why it’s important.
Mandatory payment increases can overburden retirement incomes and limited savings. Refinancing may not be an option if borrowers are unable to qualify for more stringent “ability to pay” regulations lenders are required to document. Inability to refinance or make the higher payments may require the lender to call the loan and commence foreclosure.
Solution.
Homeowners 62 and older should consider the unique terms a HUD/FHA insured Home Equity Conversion Mortgage (HECM). Designed for those who want to age in place, this program eliminates monthly payment obligations among other benefits cited below.
Rising prices, volatile markets, and longevity risks are increasing retirement challenges. Home equity, properly used, might be a resource to improve financial security. Because home equity is not liquid, it is commonly overlooked as a financial resource. However, HECMs could be a solution and should be evaluated.
Are HECMs safe?
HECMs are protected by federal (HUD/FHA) insurance guaranteeing performance as long as the loan is in good standing. Then, regardless of what change may occur in the economy, financial markets, or real estate values, the loan terms and funding are guaranteed, even if the lender goes out of business.
Reverse mortgage benefits
• Improved cash flow: Monthly payments are not required.
• Increased liquidity: Withdrawals are received income-tax-free.
• Credit line growth: The undrawn balance of the credit line grows (compounds monthly).
• No maturity date: Repayment not required until no borrower resides in the property.
• Non-recourse loan: No personal liability.
• Protection against real estate and/or financial market declines.
• Guaranteed terms while good standing is maintained.
• Borrower obligations (to keep the loan in good standing) limited to:
• Keeping real estate taxes, homeowners’ insurance, and property charges current
• Providing basic home maintenance.
• Continuing occupancy as primary residence.
What to do?
Older homeowners should learn if they are eligible and how potential benefits might apply to their situation. While HECMs provide significant financial and other benefits for many, they may not be a suitable solution for others. Suitability requires thorough evaluation of financial and non-financial circumstances. Consultation with a Certified Reverse Mortgage Professional is recommended.
HECM considerations: *https://fred.stlouisfed.org/series/CSUSHPINSA
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. 

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