Millions of Home Equity Lines of Credit are Going to Reset in the Next Couple of Years
According to the California Association of Realtors, “Millions of home equity lines of credit (HELOCs) that were popular between 2005 and 2008 are scheduled to reset to higher interest rates soon, which could put many borrowers at risk.” Many of these homeowners will no longer be able to draw funds from their credit lines and will also be required to start paying down the loan principle. HELOCs usually have a 10-year period when borrowers can draw on the line of credit and are not required to pay down the principal balance, they are only required to make interest payments each month. After ten years, the credit line resets, and the borrower must then begin making monthly payments that include both principal and interest payments (like a normal mortgage loan). These new monthly payments are quite a bit higher than the borrowers previous interest-only payments - typically $100 to $300 per month higher.
Additionally, it is estimated that many of the HELOCs that will soon have an interest rate reset are on houses that are underwater, meaning that the homeowners owe more on their mortgages than their homes are worth. Most of these HELOC resets will take place between 2015 and 2018. These homeowners will not be able to refinance and could potentially run the risk of defaulting.
These higher payments are going to be painful for many borrowers. It will be interesting to see if the large banks are going to be willing to do loan modifications with some of these borrowers rather defaulting because the homeowners can no longer afford their mortgage payments.
We’ll keep an eye on this and provide an update in the future.