Review your loan terms…
Did you know your HELOC has a due date? Do you know when your HELOC becomes due? Did you know banks can freeze your home equity line of credit at any time? Could a reverse mortgage be the financial tool that can save you from the challenges others are dealing with?
The Personal Finance Perils of a Sales Driven Mortgage Marketplace
Years ago, before I started in the reverse mortgage business, a loan officer sold me on a “just to have it.” HELOC. I had never had one, it was my first home. I was told it was the thing to do to have more ‘financial freedom’ and access to credit and cash when I might need it in the future. The terms were not explained thoroughly nor did I read them. I was fortunate that it turned out fine for me, but many people have, and will be caught unaware.
The Credit Line Crisis
Used well, and understood, regular lines of credit and home equity lines of credit can be a fantastic financial tool. Their low costs and flexibility can make them extremely attractive. Unfortunately, just when homeowners counted on using them, many got cut off.
When the crisis kicked off in 2005 and the credit crunch kicked in, some lenders froze or withdrew lines of credit from homeowners. Many went from sleeping well knowing they had $40,000 or maybe even $200,000 in a credit line if things got tough, to having no credit, and a big bill to cover. Simultaneously, many credit card companies followed suit.
Do You Know Your HELOC Terms?
Credit line suspension aren’t the only thing that can take borrowers by surprise. Do you know your lender can change the terms and conditions of your credit line?
Interest rates can change if you don’t have a fixed rate home equity loan. Floating rate loans aren’t bad, but borrowers do need to anticipate how they can impact repayment.
The biggest shock many will encounter is when draw periods convert to repayment periods. Depending on your terms you may have 10 or 15 years to draw down credit from your line. Then the entire balance may be due in a ‘balloon’ payment. Or your line may convert to a principle and interest repayment mortgage for the remaining years. Note that these payments will be a lot higher than on a 30 year mortgage, due to the shorter term.
If you are aware of the terms and potential changes, and plan for them, it doesn’t have to result in a financial disaster. The key is knowing and reviewing.
The New $265 Billion HELOC Debt Balloon
Approximately $265 billion in home equity line debt is about to shift into repayment phase. Over the last two years there has been a 307% increase in 90 day plus delinquencies among those rolling over into repayment periods. Many homeowners are not just unaware of these features of their current loans, but are unprepared. Those in this situation are up to 112% more likely to fall behind on car loans payments, and credit cards as well.
Older borrowers have to ask themselves if they have the income to make full payments. When a HELOC enters the repayment phase, the monthly payments can sometimes more than triple.
Lenders are not obligated to extend credit lines or provide refinances. A fact that is only now making it into new closing disclosures.
The Advantage of Reverse Mortgage Credit Lines
Reverse mortgage credit lines are different. With a reverse mortgage credit line, once it is established, the lender cannot cut it off. As long as the homeowner is meeting the contract guidelines, they can count on their credit line being there. That means the property remains a primary residence, so they are current on property charges such as insurance, taxes, and are maintaining the house.
“I actually saw one woman whose loan balance exceeded her property value, and she still had $40k available in her reverse mortgage credit line. That was a cool thing to see.”
Some of the other most powerful benefits of a reverse mortgage are that:
- You can use them to pay off existing HELOCs and mortgages
- There are no payments due on your reverse mortgage credit line
It is extremely important for all home buyers and homeowners to work with experienced loan professionals that really know their products and services. It is crucial that everyone with a HELOC reviews the terms of their credit, and has a plan to deal with changes. Older property owners may find that this is the best time to make the switch to a reverse mortgage credit line that will ensure financial security for the rest of their lives.
Do you know your HELOC terms?