HELOCs were never designed for retirees. They are designed for working-age people… people whose incomes tend to rise over 10 years and then can expect to refinance the loan when it becomes fully amortizing and the monthly payments increase. That’s the opposite of someone who’s 65 or 70 and retired.
HELOC stands for Home Equity Line of Credit. It’s the most common way for people to tap equity in their homes.
HELOCs are loans secured by the equity in a home. They require borrowers to make interest only payments on the money borrowed for the first 10 years After 10 years, they become fully amortized loans, meaning that the borrower must start making monthly payments of both principal and interest for the next 20 years.
That means that after 10 years, if the loan is not repaid or refinanced, the monthly payments on a HELOC can increase significantly. Most of the time, after 10 years, borrowers refinance in order to pay off their HELOCs, which is fine as long as they’re still working and/or have the income to qualify for a new mortgage.
But for people in their 60s or 70s, refinancing in 10 years may be difficult or even impossible leaving them stuck having to make the higher monthly payment at the worst possible time. And that’s when things can become a real problem and many have lost homes to foreclosure as a result.
Many things change as we get older and one of those changes is that our incomes tend to go down as we age. Few people see their incomes increase between age 65 and 75. Getting older can also mean increased health care related costs. And who knows how much the house will go up in ten years?
Using Home Equity is Not a Bad Thing to Do…
There are many good reasons for people to access their home’s equity, however. Home improvements and debt consolidation are the most common reasons that people use HELOCs and there’s nothing wrong with that… unless you’re retired.
Reduced income and higher expenses may mean that refinancing your mortgage 10 years from now is impossible, so before taking out a HELOC, you need to consider that you may get stuck having to make the higher payments when your HELOC is ten years old… and you’re ten years older.
The other negative about a HELOC is that these loans can be cancelled by the bank at any time and for any reason they see fit. And that means that having a HELOC for “emergencies,” may provide a false sense of security. As far too many people with HELOCs learned the hard way back in 2009, when you need it, it may not be there.
So, why am I writing this?
I’m writing this because there are several alternatives to a HELOC that are available to homeowners that are over age 62. And people need to know about them… because they can be much better for older homeowners.
There are new credit line products that are much better for older homeowners…
There are a couple of credit line products today that are like a HELOC, in that they provide a loan secured by the equity in your home, but unlike the HELOC, these products don’t REQUIRE you to make monthly mortgage payments on any certain schedule. You CAN make payments whenever YOU want to make them, but you never HAVE to make monthly mortgage payments… which also means you can never be late on a mortgage payment.
That difference alone makes them a better choice than the HELOC.
Why would anyone choose a loan that requires monthly mortgage payments when you could choose one that doesn’t? With these products, you can make mortgage payments whenever you want to… monthly, quarterly, annually… it doesn’t matter and it’s totally up to you.
If you choose not to make a payment, then the interest is simply added to your balance. So, if you borrowed $100,000… and the interest rate were 3%… and you made no payments all year, then at the end of that year, you’d owe $103,000. Simple, right?
In addition, these new credit line products for older homeowners don’t fully amortize after 10 years like the HELOC does, so there’s no payment shock as there can be when HELOC payments increase. And, these new products are “non-recourse” loans, so even if real estate crashed as it did in 2008, upon your death your estate would never owe more than the home’s market value at that time.
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Just like the HELOC, these new products offer a revolving line of credit, so you can use it whenever you want or need to… then pay it back on whatever schedule you choose… and then borrow from it again whenever you want or need to. The loans don’t have to be repaid until the homeowner(s) either die or sell the property.
Those things also make the new products better than the HELOC for older homeowners.
These new credit lines cost about the same as the HELOC and the interest rates are competitive, so why would anyone considering a HELOC not choose one of the new products instead?
There’s only one reason I can come up with… they simply don’t know they have the options that they do. If they did, I have to believe, they’d never choose the HELOC.
The reason that more people don’t know about the alternatives to the HELOC is two-fold. For one thing, these products are new, having been developed over the last couple of years, so in that sense it makes sense that many people wouldn’t yet know.
The other reason is more troubling.
Almost all banks offer HELOCs, but not all offer these new line of credit options for older homeowners, so when people walk into their own bank and ask about a HELOC… since their bank doesn’t offer the new alternatives … they aren’t told about them.
I absolutely hate that answer, but I’m afraid it’s true.
Personally, I think all lenders should always recommend the best product for their customers even if they don’t offer that product. It’s simply too important a decision, especially for older homeowners who can run into financial difficulties due to unexpected medical costs and/or other life events.
But, I’ve asked and they simply don’t. Unfortunately, banks will sell their own programs every time, even if there’s something better down the street.
Another alternative to the HELOC is called the HECM Line of Credit (LOC).
HECM stands for Home Equity Conversion Mortgage and it’s the federal government insured reverse mortgage program that allows homeowners over age 62 to access the equity in their homes without having to make a mortgage payment on the loan until death or sale of the home. Just like with the new products mentioned above, homeowners can make mortgage payments whenever they want to, but they never have to.
As long as you remain living in your home and continue paying your property taxes and insurance, the HECM Line of Credit is guaranteed for life, as opposed to only 10 years like the HELOC, which can be an important advantage or older homeowners. A HECM Line of Credit is guaranteed to be there when you need it. The HELOC is not.
Retirement Today…
Retirement today is measured in decades, not years, so many homeowners would benefit from having a line of credit that lasts as long as they remain in the home. And the HECM LOC is also a non-recourse loan, so neither you nor your heirs will ever have to repay more than the current market value of the home.
Plus, the amount you can borrow from the HECM Line of Credit is guaranteed to increase every year by whatever the interest rate is, plus half a percent.
So, let’s say you opened a HECM Line of Credit for $200,000 and the interest rate was 3.5%. That would mean that the following year your available line of credit would go up to $208,000… (3.5% plus half a percent is 4%.) And, that growth would keep happening year after year.
That means that if you opened a HECM Line of Credit at age 62 for $200,000… and you never borrowed the money, you just let it grow… then in 20 years, you’d have a line of credit of something close to $500,000, and you could use that money tax-free for any purpose at any time without having to make a payment until you die or sell the home. (Amounts are for illustration purposes only. Actual amounts will vary.)
It’s a very good strategy for people who didn’t buy long-term care insurance in their 50s when it was more affordable. Instead of long-term care insurance, people can open the HECM LOC in their 60s and when they are in their 80s, they’ll have a line of credit that’s available income tax-free and doesn’t require monthly mortgage payments that they can use for in-home care or whatever they need at that time.
And, of course, if they don’t end up needing the money, they don’t have to borrow it.
The HECM LOC does cost more to set up than a HELOC, but for homeowners who plan to stay in their homes for many years to come, it can be worth it. In fact, used properly, it could just be the cheapest insurance policy you’ve ever bought.
Still, according to the 2016 Survey of Consumer Finances by The Urban Institute, for every HECM that’s originated in this country, there are 11 HELOCs taken by people over 62. Why? I have to think that people just don’t know what the alternatives are, because if they did… I’m certain this wouldn’t be the case.
If you’re considering a HELOC, you owe it to yourself to know how the new alternative line of credit products and the HECM Line of Credit compare. The HELOC has been around longer, sure. It will take time before everyone knows that there are better options for older homeowners.
But, better is better. The news will spread… and is already spreading. (Over a million American homeowners already have HECMs.)
If you want more details on the new line of credit options for older homeowners or on the HECM Line of Credit and how it can be integrated into your retirement plan, email me at: mandelman@mac.com. It’s my favorite subject so I’d love to both answer your questions and hear your opinions.
Also, here’s a link to my HECM Video FAQ page where you’ll find many of the questions people have about HECMs explained clearly in short videos. It’s the sort of thing you can only find on MandelmanMatters.com. (Click that link and scroll down to subscribe.)
Mandelman out.
