Wills, Trusts & Estates Prof Blog: Home Equity Loans and Retirement

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August 25, 2012

Home Equity Loans and Retirement

If a person owns a Home-Equity Line of Credit (HELOC), then that person might want to consider the following potential problems. For those who do not have a HELOC, this is a "variable rate line of credit?much like a credit card?on which you borrow money against the equity in your home." The problem with HELOCs is that homeowners could lose their homes if they use them as collateral to receive the loan. These homeowners usually have a 10 year period where they are only required to pay the interest on the loan. Following this period, the homeowner will then be subject to paying both the principal and the interest, which could be more than some people are able to pay. If these individuals cannot pay, then there homes could be subject to foreclosure. This problem could become worse for these people because HELOCs often have an adjustable rate. At the moment, interest rates are low but that could change. This might increase HELOC holder's payments to the point where many are unable to pay their loan.?

If a person owns a HELOC?then that person might want to consider planning ahead for a future-time when the rate would increase. However, most would recommend getting rid of the HELOC. There are a number of options that a person might want to consider. A person might want to re-finance the loan or pay the principal amount of the loan as soon as possible. However, these options only work if the person has some time before that person reaches retirement. If a person is reaching retirement, then that person might only have a few options. A person might want to consider rolling his or her HELOC in that person's first mortgage, however, this is only an option if the person has equity in his or her home. If that is not an option, a person might want to consider using a reverse mortgage. This type of mortgage allows a "homeowner to access a portion of their home equity as cash." The borrower repays the loan only after the borrower moves, sells, or dies. This would allow an elderly person to stop payments on his or her HELOC. The only problem is that the HELOC might have destroyed most of the home's equity, and so a person might not qualify for this.?

See Robert Powell, Home-Equity Loans Could Sink Your Retirement, Wall Street Journal, Aug. 23, 2012.

Special Thanks to Brian J. Cohan for bringing this article to my attention.?

August 25, 2012 in Non-Probate Assets | Permalink

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