By Rachel Hemmingson, Consultant & Advocate for Aging Well
Leverage adds capacity when you wish to accomplish something. During this time of social distancing, I see many homeowners accomplishing a lot using leverage to bring beauty and improvements to their homes.
The garden center down my street is doing an amazing business all day long. My interior designer friends are busy working remotely.
Leverage, as a word and concept, is not often used, yet it offers amazing “power.” For the purposes of this article, consider a distilled definition: “The mechanical advantage of power gained by means of using a lever.”
As a girl on the farm I saw my dad be very clever with leverage. He moved large objects using a steel bar placed over a rock with the tip under the object to be moved, the long handle out where it could be pushed down with ease, raising the object on the other end.
The only risk in using that kind of leverage was biting off more than you could chew with what you were moving around.
Lenders are swamped with homeowners refinancing their homes to get cash for home improvement and other needs. This is called “leveraging their asset.”
As with biting off more than you can chew moving large objects around, there are risks to leveraging your house. Here are some things to know.
A “line of credit” or a “cash-out refinance” are ways to access some of your equity – the potential monetary value of your house over and above what you may owe.
In more normal times, these are fairly straight-forward to obtain. Your bank would set you up with a line of credit quickly and for almost no fees. A refinance, which may be called that even if your home is owned outright and you are not redoing a current mortgage, has also been fairly easy to get.
Lenders need to ensure you would be able to afford to make payments on any cash that would be extended. As most lines of credit are adjustable, they have to see if you could afford it when you’d used all of the cash and the interest rate had adjusted to the maximum, even 12 percent.
Often retirees have found they could not qualify for much under those criteria and they could end up in trouble trying to make those payments if they were able to qualify.
Now things have changed and are changing more.
• Many banks are no longer allowing cash withdrawals on refinances.
• Several larger banks no longer offer lines of credit.
• Some banks are cutting current borrowers off from line of credit funds they thought they could use if they needed them.
The reason for this distressing reality is that lines of credit are known as recourse loans. The lender can change your terms at will.
Lenders are concerned about the risks they face from so many homeowners losing their jobs and possibly defaulting on their mortgages. They are protecting themselves.
A lesser known line of credit may be available through a Home Equity Conversion Mortgage. These are only available for homeowners age 62 and up.
They are non-recourse loans–protected by the Federal Housing Administration. Additionally, the line of credit has a growth rate on any funds sitting unused so the money you draw out of it doesn’t require monthly payments.
These are repaid when the house is sold, so they are secure as long as you pay your property taxes and insurance.
If you are nervous about having enough available cash in these uncertain times, it’s a good idea to explore your options.