Reset For Homeowners With Heloc’s
Many homeowners took out HELOC’s (Home Equity lines of Credit) during the housing boom. Now the typical 10-year term on these loans is expiring, and many homeowners will be surprised their monthly payments are about to go up and in some cases substantially.
HELOC’s provide the homeowner to get funds, when needed, over the term of the loan if the amounts stay below the loan limit set at the time of the original loan. This money can be sued for major expenses, such as home improvement, college tuition, pay off high interest rate credit cards or car loans. The loan is secured by a mortgage and the loan typically have a 10-year term and require interest only payments. After the initial 10-year period, the HELOC will reset and the principal becomes due. At that point the homeowner can chose to pay off the balance, refinance or make payments for principal and interest, typically for a 20-year term.
Per some banking executives, a typical $50,000 loan at a rate of 3.25%, the interest only portion of the loan payment would be $135.42 per month. At the end of the term, the loan would recast to a 20-year loan, with a new principal and interest payment (PI) of $283.60 per month.
In a recent survey taken, 23% of these HELOC homeowners had no immediate plans to handle the end of their 10-year loan. Only 19% understood how the HELOC resets at the end of the initial 10-year term, and they were unaware their payment would increase.
Some customers were surprised their loan was expiring and the new terms would kick in. Homeowners took advantage of the increase in real estate’s values in 2006, which made HELOC’s attractive and provided homeowners with lots of equity to access.
Housing pricing have risen since the crash and they are approaching levels to within 0.3% of new national peak. Even with the increase in values, there are still an estimated 2.2 million homeowners underwater or have negative equity.
Homeowners who are unprepared for the payment shock, as well as the rise in interest rates, could find themselves in default, prompting the banks to take legal action to collect the outstanding balance or commence foreclosure.