At the peak of the housing boom in 2005/2006/2007, many people took out HELOC (Home Equity Line of Credit) loans that allowed interest only payments for 10 years. But after that 10 year term is up, everything changes as principal is now added to the interest payments. Then to add insult to injury, many people are only vaguely aware of what this means. They had assumed the equity in their home would continue to grow and planned to sell before this loan was even due, along with various other scenarios based on the assumption the housing market would remain strong. But as we all know, in 2008 everything changed.
Between December 2015 and March 2016, the default rate on HELOC loans jumped from 0.5% to 1.9% – potentially tripling the HELOC loans in trouble. Another large amount of loans have reset in 2016, leaving many unprepared homeowners with new debt. For senior homeowners, a reverse mortgage can help.
To obtain a HECM reverse mortgage the borrower(s) must be aged 62 and over, live in their primary residence they’ll be wanting to loan on, and have at least some equity in the home. They CAN have a mortgage or a HELOC on the home, and still be able to get a reverse mortgage. Some of the funds would need to be used to take care of these existing loans – but once that is done, the borrower will have access to the remaining funds to use as they see fit and they will always live mortgage and loan payment free.
Here’s a how a Reverse Mortgage can help with a HELOC:
Scenario 1 – Homeowner has existing HELOC that has reset to include principal as well as interest. Because the HELOC was obtained 10 years ago, before retirement, income has drastically changed and the borrowers are now living on a much tighter budget – that did not include this reset.
Solution 1 – By exploring the reverse mortgage idea, the homeowner finds they can completely eliminate the HELOC and convert the additional equity in the home into cash via a reverse mortgage line of credit or monthly installments – all while living loan and mortgage payment free.
Scenario 2 – Homeowner has a HELOC that is about to reset on a vacation home, while their primary residence is nearly paid off.
Solution 2 – By obtaining a reverse mortgage on their primary residence, they have the liquid funds available to pay off the HELOC on the second home without acquiring a payment on the primary home. And by using a reverse mortgage line of credit, they have created a nest egg for use now or in the future.
These are only two examples of how a reverse mortgage can be used to manage debt. Have more questions? Don’t hesitate to contact me!
Sara Cornwall is a local Reverse Mortgage Advisor serving the entire state of Connecticut. Contact Sara and learn if reverse mortgage is right for you.