HELOC’s

Seniors Seeking Additional Money

I have been sharing different ideas in my last couple of posts about the options for a senior if they want to borrower equity out of their home and whether or not they are a good or ideal solution to solve a financial problem or simply wanting extra funds to be available to them for any use.

I’m going to continue this discussion in this post and one more that will follow it in a few days.

In the last couple of days, I talked about the traditional HELOC, the one that every Bank offers to their customers and now  let’s pick up where I left off.

The HELOC will allow interest only payments for the first 5 years, but then will adjust to a much larger payment. Plus, the lender at any time can “freeze” the account and the funds in it will not be available to the borrower.

Too often the borrower is unaware that the loan will be “reset” in the future and if they no longer have the same income as they did when they initiated the transaction, they may not be able to afford the new and higher payment.

Sometimes a senior will use one of these loans for additional income to pay on going expenses, but obviously they will eventually run out of money in the HELOC and of course, will have mortgage payments for the term of the loan.

This can be disastrous for a senior and possibly result in them losing their home through foreclosure if they are unable to afford the payments.

The next possible choice, would be to do a traditional fixed rate 2nd Trust Deed. At least you will know what the payment will be each month, but again the borrower is obligating themselves to a mortgage payment for 15 years and they may not have the income in the future to continue comfortably making the payment each month.

And if they are a senior and or hoping and or planning to retire within a few years, will they be able to afford this obligation every, single month?

So would be the next choice?

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The Differences Between a HECM and a HELOC

I previously discussed in earlier posts some of the details and considerations when a senior might be thinking of borrowing equity from their home and they have four options.

  • Refinance their home using a traditional mortgage – There will be a monthly payment
  • Do a Home Equity Line of Credit/HELOC – % only for five years then become fully amortized for remaining 10 years.   There will be a jump in the monthly payment.   “Payment shock”
  • Get a Fixed rate 2nd. Deed of Trust – Fully amortized monthly payment for 15 years.
  • Use a HECM/Home Equity Conversion Mortgage; a “reverse” mortgage.   No payments or loan term.  It is in effect as long as the borrower continues to occupy the home and/or they”pass” away.

Let’s examine the options a little bit closer.  The first three choices all require the borrower to qualify using their income and credit, plus they will have monthly mortgage payments.

Initially, the first 3 options are less expensive in closing costs, but there are risks associated with obligating oneself for a mortgage payment in the later years of their life.

If the borrower is currently employed and plans on working for many more years, then maybe the first 3 choices are ideal.  But what if you want to retire?  The mortgage payments won’t go “away”, the borrower will have to continue to make them each month.

Doing a traditional “cash-out” refinance is certainly an option to consider especially if the existing mortgage is at a high interest rate or it’s an Adjustable Rate Mortgage  ( who knows what will happen with interest rates in the future?  They will probably increase).  And of course, there is a monthly mortgage payment to be made.

Is this a particularly good option for a senior to continue to maintain an ongoing mortgage for many more years?

I will discuss the other three mortgages in my next post and each of them can be appealing depending on the borrower’s circumstances and what they are attempting to accomplish.

 

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