Avoid a financial cliff: Seniors with home equity line of credit threatened

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:

• 33% were not aware of the reset provision in the agreement.  That number increased to 42% among seniors.
• 34% believe their payments will be reduced when the HELOC resets. Only 19% understand their payments will increase.
• 60% do not have a plan for their HELOC resets, and indicated they do not plan to seek guidance from their lenders.
• 53% of HELOC borrowers opening accounts between 2005 and 2008 don’t know what the impact on their monthly payments will be at the time of reset (2015 – 2018).

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.

• Most HELOCs are adjustable rate mortgages (ARMs), which means the interest rate and monthly payments are vulnerable to future rate changes.  Therefore, the higher (reset) monthly payments may be subjected to ongoing increases if rates continue to rise.
• HELOCs that are accompanied by a superior first mortgage present additional risk in that the combined monthly payment increases could potentially cripple household budgets, especially if the first mortgage is an ARM, also subject to payment increases if/when interest rates rise.
• HELOC defaults and foreclosures have already begun, and more are expected in coming years.  In the wake of the Great Recession (2008–2013) new lending industry and regulatory restrictions have increased eligibility requirements, which may prevent some seniors qualifying for traditional refinancing options.  HELOCs were easily accessed during the “wild west” days of the housing boom when almost anyone could qualify.  Not so today.

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:

• Refinance to a reverse mortgage, which will eliminate future payments and not come due until the last senior homeowner permanently leaves the home.
• Refinance to a traditional mortgage or HELOC, if qualified and affordable.
• Payoff balance with other resources if available and appropriate.
• Sell home and relocate – downsize, rent, or move in with family member.
• Other options may be available.

Conclusion
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).