Reverse Mortgages Can Be a Solution to Major HELOC Resets.

There will soon be significant changes for many Home Equity Line of Credit (HELOC) borrowers that could amount to considerable increases in payments.

But a solution may also be available for those who qualify: a reverse mortgage line of credit.  In the next few years, many homeowners who have taken out a Home Equity Line of Credit (HELOC) will encounter a potential reset, which means their monthly payments could soar.

Some homeowners could benefit from switching to a reverse mortgage or, more specifically, a Home Equity Conversion Mortgage Line of Credit (HECM LOC) instead.  To do this, the HELOC borrower would refinance the existing loan into their forward mortgage and then take out the reverse mortgage as a new loan.

A HECM line of credit is a type of reverse mortgage, available to homeowners 62 and older, that is similar to a HELOC in that it taps into the equity a homeowner has built up in their home and allows the homeowner to take out funds.

Refinancing your HELOC into a Reverse Mortgage Line of Credit (HECM)

Differences between a HECM and a HELOC

A potential HELOC reset is a real concern for many Americans.  Of more than 800 homeowners surveyed by TD Bank between Aug. 29 and Sept. 5, 2016, 43% will be affected by a reset in the coming years, according to the bank’s HELOC Reset Measure.

Even more shocking is that 19% of those homeowners didn’t understand that a HELOC reset would increase their monthly payments.  And 34% think their monthly payment will be reduced with a reset.

Under typical HELOC terms, when a homeowner takes out a HELOC, they are usually allowed to draw on it for 10 years and make monthly payments that apply to the interest.

But after the draw period ends, borrowers must repay the principal and the interest.  The 10 years for many HELOC borrowers is ending because there was a surge in HELOCs during the recession between 2005 and 2008, meaning there is a high reset activity between 2015 and 2018.

HELOC and dollars

HECM vs. HELOC Comparison

A few significant differences are when comparing a HECM to a HELOC.  HECM LOCs require the borrower to be at least 62 years old to apply.  The line of credit in a HECM LOC remains open and can’t be frozen or canceled by the lender, and the loan is insured by the Federal Housing Administration (FHA).

One crucial difference is that HECM LOCs do not have a set due date like a HELOC, which typically has a due date of 10 years.  The due date for a HECM LOC is typically after the last borrower passes away or moves from the home permanently.

For HELOCs, a monthly payment is required, which is usually some combination of the interest and principal amount.  And after the 10 years is up, there is a reset that can increase these payments even more.  A downside of a HELOC is that they can be extremely unreliable.  A HELOC can be decreased or even closed without warning to the borrower.

But a HECM LOC is much more reliable.  It remains open as long as the borrower lives in the home and follows all loan terms.  But one of the biggest and little-known benefits of a HECM LOC is that it can grow significantly over the life of the loan, which some homeowners see as a huge advantage.

The strategy of taking out a HECM LOC earlier than needed can benefit in the long run if a homeowner waits to tap into it for five or even 10 or more years.

For many homeowners who have a HELOC or may be considering one, it is essential to at least entertain the option of a reverse mortgage because it can completely eliminate a monthly payment and doesn’t run the risk of resetting and forcing the homeowner to drain their savings to pay it off.

Also See: HECM VS. Refinance: Is there a difference?

HELOC vs Reverse Mortgage Product Comparison

Compare FeaturesHome Equity Conversion Mortgage (HECM)Proprietary Reverse Mortgage
Traditional Home Equity Line of Credit (HELOC)
Borrower Minimum Age625518
Line of Credit TermLifetime 10 Years 10 Years
May Be FrozenNo*Yes*Yes*
Line of Credit Growth RateFor Life7 Years No
$0 Monthly Payment OptionYesYesNo
Income Requirements Limited Limited Yes
Credit ScoreAnyAny680+
ReservesAnyAny2-6 Months PITI
Low/No Closing CostsNoYesNo
Fixed Interest RateNoNoNo
Common IndexTreasuryTreasuryPrime Rate
*HELOC loans generally permit lenders to freeze or reduce a credit line if the home's value declines significantly. You must be prepared to make this “balloon payment” by refinancing, obtaining a loan from another lender, or using other means. You could lose your home if you cannot make the balloon payment.
**All line of credit programs may be frozen if you fail to maintain taxes and insurance or leave your home as your primary residence. If you enter bankruptcy, courts will not allow you to incur new debt while in BK proceedings, and therefore your line of credit during this time could also be frozen.

For more information about how a reverse mortgage line of credit can help if you face a HELOC reset, call Toll-Free at (800) 565-1722 or continue exploring with our new Reverse Mortgage Line of Credit Calculator.

Most Popular Reverse Mortgage Payment Options - Insights by Expert Cliff Auerswald

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