Reverse Mortgages Can Be Solution to Major HELOC Resets. There will soon be big changes for many Home Equity Line of Credit (HELOC) borrowers that could amount to huge increases in payments.
But there’s a solution that 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.
One option that some homeowners could benefit from is 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 his or her forward mortgage, and then would take out the reverse mortgage as a new loan.
A HECM line of credit is a specific type of reverse mortgage, available to homeowners 62 and older, that is similar to a HELOC in the way that it taps into the equity a homeowner has built up in his or her home and allows the homeowner to take out funds.
Differences between a HECM and a HELOC
A potential HELOC reset is a real concern for many Americans. Of more than 800 homeowners who were surveyed between Aug. 29 and Sept. 5, 2016 by TD Bank, 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 will increase their monthly payments. And 34% actually think that their monthly payment will be reduced with a reset.
Under typical HELOC terms, when a homeowner takes out a HELOC, they usually are allowed to draw on it for 10 years and make payments each month that apply to the interest.
But after the draw period ends, borrowers have to pay back the principal as well as the interest. The 10 years for many HELOC borrowers is coming to an end because there was a surge in HELOCs during the recession between 2005 and 2008, meaning there is a period of high reset activity between 2015 and 2018.
HECM vs. HELOC Comparison
When comparing a HECM to a HELOC, there are a few major differences between the two. 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 important 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, there is a monthly payment 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 of the terms of the loan. But one of the biggest, and little known benefits of a HECM LOC is that it has the potential to grow significantly over the life of the loan as well, 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.
HELOC vs Reverse Mortgage Product Comparison
Compare Features Traditional Home Equity Line of Credit (HELOC) Home Equity Conversion Mortgage (HECM) Proprietary Reverse Mortgage
Borrower Minimum Age 18 62 55
Line of Credit Term 10 Years Lifetime 10 Years
May Be Frozen Yes* No* Yes*
Line of Credit Growth Rate No For Life 7 Years
$0 Monthly Payment Option No Yes Yes
Income Requirements Yes Limited Limited
Credit Score 680+ Any Any
Reserves 2-6 Months PITI Any Any
Low/No Closing Costs No No Yes
Fixed Interest Rate No No No
Common Index Prime Rate Treasury Treasury
**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.
Video explaining Reverse mortgage LOC growth
For many homeowners who have a HELOC or may be considering one, it is important 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 his or her savings to pay it off.
For more information about how a reverse mortgage line of credit can help in the event you are facing a HELOC reset, call us Toll Free (800) 565-1722, or continue exploring with our new Reverse Mortgage Line of Credit Calculator.