Billions of dollars’ worth of home equity lines of credit (HELOCs) are about to amortize by 2020, and if you’re one of those borrowers who has one and you’re aged 62 or older, don’t panic—you might be able to use a reverse mortgage to pay off your loan.
According to a recent report from Moody’s Investor Services, around $30 billion of HELOCs are going to start amortizing. What this means is that the loan’s initial 10-year interest-only period is over, and borrowers must start making payments on both interest and the loan principal.
Sometimes this results in “payment shock” as borrowers are unprepared or unable to make a payment that may be substantially larger than what they’re used to.
“The majority of HELOCs begin to amortize between 2015 and 2020, which is when the obligors will experience payment shock,” the analysts write in the Moody’s report. “Most of these HELOCs were originated at the height of the crisis between 2005 and 2007 when credit-underwriting standards were dismal. As such, they are a particular concern.”
While it varies from borrower to borrower, some homeowners with a HELOC about to start amortizing could see their monthly payments increase by hundreds of dollars, according to Moody’s. For older homeowners on a fixed income, this could pose a problem.
HELOC to HECM
Worried that you might be among the borrowers who will experience “payment shock” this year? You don’t necessarily have to be: If you’re age 62 or older, you could be eligible to take out a Home Equity Conversion Mortgage (HECM), a federally-insured reverse mortgage loan that lets you borrow against the equity you’ve built up in your home.
The outstanding amount of your HELOC will impact the amount you’ll be able to receive from your reverse mortgage, as proceeds typically depend on your age, your home’s value and level of available equity, and current interest rates.
One of the terms of the HECM program is that borrowers can’t have any other outstanding liens on their home. So say you have a HELOC and you want to take out a reverse mortgage—you’d have to refinance your HELOC into your existing “forward” mortgage, if you have one, and you would have to have enough equity left in your home to pay off that loan, along with certain other loan conditions relating to home repairs or maintenance.
Then, if there’s anything left over after fulfilling all the mandatory obligations, you can use the remaining proceeds however you’d like, whether it’s to improve your monthly cash flow, pay for ongoing expenses, or even prepare your home for aging in place.
Even if you don’t have a HELOC right now but have been considering getting one, a HECM may be a better option for you, depending on your situation. Unlike HELOCs, reverse mortgages don’t require any monthly repayments, and the loan doesn’t become due until you pass away or leave your home.
At that point, the loan and the interest it has accrued must be repaid by you or your heirs, typically by selling the home. However, in the event your loan balance ends up exceeding the current value of your home, rest assured that you will never have to repay more than what your home is worth, thanks to the HECM program’s non-recourse feature.
According to ARLO™
“You must remember that the funds only grow on the unused portion of the line. There is no growth on funds already used as they are accruing interest, so they do not result in an increase in the amount available to borrowers. The growth is not interest borrowers are earning. This is not a bank account where you have money sitting and were you are accruing interest.
It is an increase in your line and if you borrow those funds, you or your heirs owe those funds when the loan becomes due. If you decide never to borrow them, there are no funds available to heirs, but you and your estate do not owe them either. The equity remains in the home for you or your estate if you do not borrow the money.”
Source: ARLO Calculator – https://reverse.mortgage/calculator
Features of HECMs
The HECM program gives you several loan options and ways to access your proceeds, including getting an adjustable or fixed rate mortgage as monthly term or tenure payments. You can also get a line of credit through your reverse mortgage that functions similarly to a HELOC but without the monthly payments.
Something else to note: the HECM program limits the amount of your proceeds you’re able to access upfront for a year after the loan closes. Once that 12-month time period has elapsed, though, there are some HECM loan variations available to borrowers that let you access the full remainder of your loan in a lump sum, or in monthly payments at a fixed rate.
The bottom line is, a reverse mortgage may be a solution for you if you’re worried about your HELOC loan resetting and whether you’ll be able to afford the new payments, or if you’ve been looking for ways to access your home’s equity.
HUD HECM Home – https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome