Homeowners Brace for Cash Crunch as HELOCs Come Due
During the height of the housing bubble, home equity lines of credit (HELOCs) were an extremely popular way for homeowners to tap into their home equity to fund a variety of purchases, such as home improvements and education expenses.
In fact, $265 billion in outstanding HELOCs were originated between 2005 and 2008. (Source: Experian, May 2015) Unfortunately, many homeowners who took out HELOCs during this time period now find themselves bracing for a cash crunch as these loans enter their repayment phases.
What is a HELOC?
A HELOC is a revolving line of credit based on the amount of equity in your home. With a HELOC, you can borrow what you need (up to the maximum allowed) when you need it (subject to any time limit on the borrowing period--typically 10 years). With a HELOC, you can use the line of credit while making interest-only payments.
What is the "repayment phase"?
Once a HELOC enters the repayment phase, you can no longer borrow from the line of credit, and your option to make interest-only payments will end. Depending on the loan terms, you will be required to pay back the principal along with interest by making regular monthly loan payments over the course of the repayment period or by making a lump-sum/balloon payment.
How does this impact borrowers?
As HELOCs enter their repayment phase, borrowers could see a huge spike in their monthly payments. As a result, industry experts fear that this could lead to a rise in loan delinquencies. Even more troublesome is the fact that many HELOCs are on properties that are still underwater, leaving homeowners who want to refinance their HELOCs with limited options. (Source: RealtyTrac, March 2015)
If you have a HELOC, what can you do?
Many lenders have begun to contact borrowers to alert them to upcoming changes to their loans. Others are working with borrowers who are having difficulty making payments. If you have a HELOC that is resetting, be sure to review your loan paperwork or contact your lender to find out more about the terms of your loan and what your new payment will be during the repayment phase of your loan. Find out what your options are. For example, if you have enough equity in your home, you may be able to refinance your HELOC.
Kenneth S. Rakes has 25 years of experience in public accounting and is a graduate of John Carroll University. Ken provides tax planning and preparation services for individuals, partnerships, corporations, estates, and trusts. Ken is a Personal Financial Specialist (PFS) providing retirement, estate, investment, insurance, and education planning for individual clients with an emphasis on the tax implications of planning decisions. Ken's other areas of expertise include: Manufacturing, Wholesale, Retail and Service Industries, Non-Profit Organizations and Sub-Chapter "S" Corporations.