Borrowers with home equity lines of credit (HELOCs) may
unexpectedly find their monthly payments rising. Mortgage rates have been on
the rise, and while that doesn’t impact borrowers with fixed-rate mortgages,
those with adjustable rates are seeing sudden increases. HELOC borrowers in particular,
have adjustable rates on these second loans, and the payments change once a
year.
Originations of HELOCs reached a peak in 2005 at $367
billion. Their popularity dwindled significantly the last few years, but as
home prices have recovered, borrowers have equity again and HELOC originations
are gaining ground. HELOC originations are estimated to reach $173 billion this
year.
For borrowers who use the line of credit, they likely will
see higher monthly payments as interest rates rise. Those increases could
amount to an extra $100 more per month. However, the increase is dependent on
the size of their loan.
"For those that have a high balance, clearly their
payment will increase, and it will cause some prepayments" Sam Khater, an
economist with CoreLogic, told CNBC. "But rates simply reflect the supply
and demand for money, and that is the growth rate in the economy."
Many HELOCs from the housing boom days had a 10-year draw
period, when borrowers only paid the interest on the loan and then made
payments toward the principal after that. HELOCs today often require some
principal payments from the onset.
Borrowers may be unaware that their costs could soon
increase. Only 19 percent of 800 borrowers recently surveyed by TD Bank
understood that a HELOC reset could cause their monthly payments to stretch
higher. Of HELOC borrowers from 2005 to 2008 who now have their loans resetting
or within the next two years, 53 percent said they were unaware about any reset
impact to their monthly payments.
"If borrowers do not have a financial plan for the end
of their draw period, they should contact their lender as early as
possible," Mike Kinane, senior vice president for home equity at TD Bank,
told CNBC. "A responsive lender will offer multiple ways for you to pay
down your line of credit."
SOURCE: DAILY REAL ESTATE NEWS
Any questions or comments, feel free to contact James Y. Kuang at (626) 371-5662 or by email: james.kuang@coldwellbanker.com
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