Home equity lines of credit (HELOCs), which opened home equity credit lines at the height of the housing bubble, are expecting their 10-year interest-only period to finish at the end of 2014. Balances due to reset will rise to an estimated $52 billion in 2015.
Assuming an interest rate of 3 percent, HELOCs have a situation where their payments could triple, creating a payment shock for borrowers: A homeowner with a $40,000 HELOC balance and a $210,000 mortgage at 4 percent will see a monthly increase of nearly $300 when the equity line converts into a 10-year amortizing loan.
Additionally, some home-equity lines borrowers will need to make balloon payments after the interest-only period, which requires them to owe the balance in full.
Borrowers may not be financially prepared for these resets, giving fear to another wave of delinquencies, the comptroller’s office is being proactive and working with lenders to assess their level of HELOC risk and be proactive about reaching out to these borrowers.
Alternatively, HELOCs should review the terms of their equity line and ask their lender any questions about how their payment will be changing.
Helocs are being encouraged to contact their lenders to learn of options in the event they are not able to make the new payments. Lending institutions can arrange forbearance plans and work with the borrower’s situation, but it starts with the borrower understanding where they are with their home equity and ability to make the newly modified payments.