Senior homeowners who have a Home Equity Line of Credit may be in for a shock they may not be aware is looming.

Long favored as the cheap and easy way to tap home equity, the commonplace Home Equity Line of Credit (HELOC) may be a ticking time bomb for senior homeowners, especially those with limited income and financial resources.

The HELOC Problem

The problem lies in the loan structure that typically includes two periods: (1) the draw period – usually the first 10 years when funds can be drawn, repaid, and re-drawn with minimum monthly payments of interest-only required; and (2) the reset or repayment period following the draw period, when the payment terms are changed.

At the reset date, the draw period ends meaning no further withdrawals are permitted, and the monthly payments are increased (amortized) to repay the outstanding balance and ongoing interest by the maturity date of the loan agreement.  Depending on the amount owed, interest rate, and remaining term (years), the increased payments can be multiples of the interest-only payments the borrowers were accustomed to paying. 

Failure to pay the increased payments on time creates a default, which if not resolved, subjects the borrowers to foreclosure proceedings. Unless the borrower(s) have sufficient funds to pay the balance off or are able to afford the higher payments, the most common solution is to refinance to another HELOC or mortgage program.

Senior Borrower Problem

In earlier working years, qualifying for a HELOC was relatively easy when income levels were higher.  Later on, if the reset period begins in retirement years when income is lower, the higher monthly payments may not be affordable, and lending guidelines may not permit refinancing to a new HELOC or other traditional mortgage program.

The days of easier money are over. In fact, you probably already know loans are more difficult to get in the post-housing crisis economy.  For seniors with limited income and financial resources, qualifying for a loan that requires monthly payments is considerably more challenging.  Unfortunately, for both borrower(s) and lender, if the problem is not resolved, the final solution is foreclosure.

Senior Borrower Solution

A better refinancing solution for senior homeowners may be the HUD/FHA insured Home Equity Conversion Mortgage (HECM) line of credit reverse mortgage.  This program was developed and approved by Congress to provide homeowners (62 and older) a home financing tool uniquely designed to meet the financial circumstances of retirees.

Routinely, HECMs have successfully refinanced HELOCs (including defaulted HELOCs) or other home mortgage programs to provide more suitable terms and/or additional funding as may be needed or desired.

Unfortunately, the HECM government insured reverse mortgage has been largely misinterpreted by consumers and professional advisors.  For the most part, this is due to lack of education, misconceptions, and overall misunderstanding of the program.  While the HECM provides unique and valuable benefits for great numbers of seniors and their families, it is not a suitable solution for all. Each situation is different requiring consideration of individual facts and circumstances as well as understanding the pros and cons of potential solutions.

HELOC vs HECM – Which is best?

The following chart compares some of the main points that distinguish HECMs from HELOCs and should be considered before a decision is made to choose either.