Will Consumers Use More Reverse Mortgages to Pay HELOC Debt?

As fixed rate loans, reverse mortgages offer a more financially predictable option to a Home Equity Line of Credit (HELOC), and some loan officers are recommending them as a way to pay off outstanding HELOC debt, reports a Market Watch article

With rates as low as they are in today’s market, an uninformed senior benefitting from a HELOC could face financial hardship once rates return to historic norms and they have to pay higher interest rates in addition to principal, according to the article. Experts are telling consumers that a reverse mortgage could help repay the HELOC debt, and that they should examine their financial situation and goals in considering the reverse mortgage as a way to get out of HELOC debt. 

 Market Watch reports:

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If, by chance, you didn’t examine your options in advance and your HELOC is about to convert or has already converted to a principal and interest payment and you’re 62 or older, you’ve got a few options, according to McBride and others.

If you have equity in your home and you qualify, you might be able to refinance and roll your HELOC into your first mortgage. If you don’t qualify for whatever the reasons—insufficient income, your house is underwater, and the like—you might want to consider a reverse mortgage.

“A reverse mortgage might work for someone who is not in a position to make a notably higher monthly payment once the HELOC requires principal payments,” said McBride.

For her part, Gray says the reverse mortgage makes the most sense when there’s no outstanding balance on the HELOC. “I know a few borrowers who were told by the bank to ‘just go get a reverse mortgage’ in order to pay off the HELOC,” she said. “The problem there is that the amount of the HELOC plus interest may have eaten up enough equity that there’s not enough equity left to be able to do a reverse mortgage. So that advice might not help many borrowers in terms of staying in their homes.”

According to Gray, the reverse mortgage is much more suitable when there is no HELOC because there are no payments to the bank until all borrowers permanently leave the home.

No matter which side of the argument you take, for some homeowners with a HELOC, it might be worth researching a reverse mortgage as a potential way out of your cash flow crunch.

“My best advice to them is to investigate what a reverse mortgage could do for them before they retire,” said Gray. “Don’t pay too much attention to the ‘experts’ on TV. Often they are experts in unrelated fields and know less than the average consumer does about reverse mortgages. It will cost them nothing to learn how it works and what it might do for them specifically. And it could cost them everything they ever worked for not to.”

 Read the Market Watch article here

 Written by Erin Hegarty 

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  • The article is both good and otherwise.  For example, the article states:  “If you don’t qualify for whatever the reasons—insufficient income, your house is underwater, and the like—you might want to consider a reverse mortgage.”  How can a senior qualify if the home is actually “underwater”?

    “If the income stream is strong then debt is not a huge consideration as long as the repayment fits within the cash flow constraints,” said McFarland. “The big problem can come when a large portion of retirement income comes from assets which makes it susceptible to vagaries of the market. That person should be looking to reduce all debt as much as possible as they near retirement.”

    I take it John McFarland would find the research of the Sacks brothers difficult to accept.

    The mortgage payment information did not pan out.  At 5% over 20 years the fully amortized payment on $50,000 would be $330 and for 10 years, $530.  Where the author got $483 from is very, very odd.  If someone who writes for Market Watch cannot do better than that…. 

  • The article was very confusing.  It seemed to treat HELOCs as second mortgages only and somehow HECMs could take out that second.

    The author just did not seem to have a great handle on the subject but if it drives incrementally new business our way then who would complain?  

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