In the last decade more senior homeowners have leveraged their home’s equity to fund their retirement years. For many it was refinancing their home for lower payments, others opened a home equity line of credit, while some chose a reverse mortgage. The most recent evolution of the federally-insured reverse mortgage significantly front-loaded loan costs which will impact the attractiveness of the HECM as a HELOC alternative.

Despite its higher upfront costs, seniors should strongly consider the long-term costs and risks associated when taking out a home equity loan. TransUnion expects that nearly 10 million homeowners will take out a HELOC in the next five years. Deja vu anyone? During the housing boom, HELOCs became the preferred way for homeowners to tap into their equity. Few, however, were aware or carefully considered the consequences of such a decision overlooking the limited draw period during which one could access the funds and more importantly, the repayment period when many homeowners experienced payment shock being required to make interest and principal payments. According to an October 2016 report from TD Bank, 33% were unaware of the HELOC’s reset provision. That number spiked to 42% for seniors. Even more concerning is 34% believed their payments decreased after ten years during when the loan reset, not knowing they would be paying significantly more.

The inconvenient truth is that seniors suffer the most having limited financial resources or a fixed income when taking out a HELOC, not fulling understanding the loan or having a plan to absorb increased future payments.

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