Home Equity lines of credit, popular during the housing boom of the mid-2000s, are now a source of concern, as many of these loans are due to reset to higher payments. The structure of a HELOC allows for a draw period where consumers can use the funds and can often make interest-only payments. Then, after a set number of years, it enters an end of draw period, where funds can no longer be borrowed and consumer payments consist of both interest and principal.
More than 92%, or $438 billion, in HELOC balances hadn’t entered their end of draw period as of the end of 2013, according to the report issued by Black Knight Financial Services on Tuesday.
An earlier estimate from the Office of the Comptroller of the Currency suggested that $171 billion in home equity lines held by the country’s biggest banks would reset between this year and the start of 2018 compared with 28 billion in the previous four years.
Getting ready for the reset, here a few tips:
- Know when the rate is set to adjust.
- Understand what it will mean for your cash flows, and take action immediately.
- Consider refinancing.
Keep in mind that variable rate HELOCs will move higher in step with Federal Reserve interest rate hikes once they commence.
The payment shock on the HELOC’s reset may put a significant number of borrowers into default, and those financial stumbles could ripple through the economy. Act Now!