Reprinted from the January 2017 issue of South Shore Senior News
By George A. Downey
A new report, TD Bank HELOC Reset Measure (October 18, 2016), documents a number of emerging and disturbing facts about Home Equity Lines of Credit (called HELOCs). The realities and conclusions are especially important for senior homeowners.
During the housing boom, HELOCs became a favored way to tap home equity. Qualification requirements were minimal; closing costs were low; and, interest only monthly payments provided wide-spread appeal. Most HELOCs include two phases: (1) a draw period – up to 10 years when funds can be drawn down and repaid as the borrowers elect; and, (2) a repayment period (called reset) when the credit line is closed and monthly payments increased to include principal and interest payments to repay the balance by the maturity date.
Misunderstandings and Misconceptions
According to the report, 43% of U.S. homeowners will be affected by HELOC resets, and most of them are unaware and/or not prepared for payment increases. The report revealed:
Payment Increases Challenge Senior Homeowners Most
Payment increase shock from HELOC resets affects senior homeowners most severely at a time when financial resources are most limited. Alarmingly, the majority are unaware of this pending reality, and unprepared for the consequences of higher monthly payments, which may not be affordable.
Triple Threat from Payment Resets
When the draw period ends (generally after 7 to 10 years) the monthly payments increase to include principal and interest to pay the balance off by the maturity date in the agreement. The record low interest rates of recent years have minimized payment requirements thus far, so the calculated increases could be sizable.
What to Do Now – Investigate and Make a Plan
HELOC reset problems are real and foreseeable. Potential solutions vary by individual, but begin with two considerations: (1) Understanding of the timing and terms of each loan agreement, and; (2) Evaluating the resources, circumstances, and objectives of each borrower, and making a plan. Potential solutions to avoid default and foreclosure include:
If you have a HELOC loan, examine the terms of the agreement carefully. Most importantly, understand when the draw period ends; what the reset terms of the repayment period are; and, determine what the impact will be on your payment obligations and financial resources. Then, explore all options available to determine which solution would best fit your needs.
About the Author
George Downey is the CEO of Harbor Mortgage Solutions, Inc., located at 100 Grandview Road, Suite 105, Braintree, MA 02184, and can be reached at 1-(800) 599-8700 or GDowney@HarborMortgage.com. George is a Certified Reverse Mortgage Professional (CRMP), Past President of the Massachusetts Mortgage Association (MMA), and a Director on the Board of Directors of the National Reverse Mortgage Lenders Association (NRMLA).