Retirement Imperiled: The Case Of HELOCs

Abstract

There is no escape from the onslaught.  Advertisements arrive in the post, in the e-mail inbox, through phone solicitations, internet pop-ups, and radio and television spots. One would think that mortgages (1st mortgages, Reverse Mortgages[1], and Home Equity Lines of Credit, HELOC,[2]) have never been as popular.  The advertisements show consumers using equity from their homes to purchase second homes, do home improvements, take luxury vacations, and go on cruises, purchase new/used/antique cars, boats, motorcycles and other consumer items.  The origin for this trend can be traced to the “Tax Reform of 1986.”  Pre “reform”, mortgages were used to pay for houses only as interest on consumer loans was also a tax deductible item.  Post 1986, the only tax deductible interest for consumers was that paid on a mortgage.  Shortly thereafter, the use of 2^nd mortgages to pay for automobiles started and the scope of uses for home equity and instruments designed to tap it has expanded ever since.  As is always the case, choices have consequences and the use of funds obtained through mortgages can have undesirable consequences, particularly on the resources available for retirement.  Thus, this research will explore the changing view of debt on the part of US Consumers’ and the impact of this increased level of debt on consumers’ spending habits, home equity and retirement security.