Many homeowners find peace of mind in having a Home Equity Line of Credit (HELOC), often known as a second mortgage,on their homes. Just having access to several thousands of dollars should it be needed in an emergency provides peace of mind for millions of Americans.
But there are problems on relying on a HELOC once a homeowner retires. Generally, retirees can be overly dependent on the HELOC because they do not have employment income. Literally, the HELOC may be the only source of emergency funds that they can put their hands on.
It turns out, though, that a HELOC may not be dependable. In past recessions, banks withdrew access to HELOCS just when homeowners needed them most. Banks cancelled, froze or reduced HELOC credit because of their own problems with lending money. Already in the Corona Virus pandemic, two major banks have withdrawn the HELOC product.
This is why financial advisors recommend that homeowners consider a reverse mortgage line of credit insured by FHA. This particular line of credit is known as a HECM LOC. Compared to a HELOC, the bank cannot arbitrarily cancel, freeze, or reduce the dollars available in the HECM line of credit. So no matter what is going on in the economy, the retiree is assured that the money will be there. Because the HECM is FHA insured, that assurance is backed by the full faith and credit of Uncle Sam.
There are other significant differences in a traditional HELOC and a HECM LOC that retirees will find helpful. Consult with your financial advisor, who along with Mutual of Omaha Mortgage, can guide you in learning how to make the most of your home equity in retirement.
“Borrowers must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees”
Shelley Giordano is founder of the Academy of Home Equity in Financial Planning at the University of Illinois and director of Enterprise Integration at Mutual of Omaha. Mutual of Omaha Mortgage is a partner of NAIFA's Limited and Extended Care Planning Center.