By: Eric Gates, President
During the housing boom of the mid 2000’s, Home Equity Lines
of Credit (HELOC) were originated at a record pace. A home equity line of
credit is a loan in which the lender agrees to lend a maximum amount within an
agreed period (called a term), where the collateral is the borrower's equity in
his/her house. In particular, between 2004 and 2008, a significant number
of HELOCs with terms of 10 years were created. The draw period for these lines of credit are coming to an end,
evoking conversation on
what happens now.
Here is a brief summary of important facts anyone with an existing HELOC should get familiar with:
· All
terms of your HELOC are outlined in the documents you signed when opening your
account and should be reviewed to gain familiarity. In particular, read through
your HELOC Agreement.
· Your
interest rate is adjustable and is tied to the prime rate. The prime rate is a
commonly used, short-term interest rate used by most banks in the United States. The
rate on your HELOC is typically adjusts as the prime rate rises and falls.
· The prime rate is
currently 3.25%. This rate is not static and is subject to change.
· Rates
are expected to rise sometime in the next year or two.
· All
HELOC’s start with a draw period during which the borrower can access the funds
on the line of credit. Typically, the minimum payment during this time frame
is interest only, although in some cases it may be a percentage of the
outstanding balance.
Which changes can you expect to come to your repayment terms now that your line of credit is amortizing?
· The
initial draw period for HELOCs opened in the 2004-2008 time frame was ten years,
in most cases. Some have already moved beyond the draw period and millions more
will be doing so within the next few years. Make sure you know when this will happen in your case
so you can prepare for it in advance. DON’T JUST WAIT FOR YOUR HELOC
LENDER TO INFORM YOU.
· At
the end of the draw period, the minimum payment requirements change, sometimes
drastically, as the HELOC enters the repayment term and funds can no longer be
accessed from the Line.
· The
payments required after the draw period are recalculated so that the balance
can be paid off in a specified period of time. Check your HELOC Agreement
to know how long this time period will be. It is likely to be 5, 10, or
20 years.
· The
shorter that time frame for repayment is, THE MORE YOUR PAYMENT WILL BE GOING
UP. For example, you’d have to pay a lot more each month to pay down the
balance in 5 or 10 years than you would to pay if off in 20.
So what should you do?
·
Read your HELOC Agreement and get familiar with
the terms.
·
Use an online calculator or ask a Mortgage
Banker to determine what your payment will change to based on your balance,
interest rate, and the length of the repayment term.
·
Consult with your trusted mortgage advisor to
see if there are options to refinance that make sense for you to
consider. Make sure you consult with someone who will give you an honest
answer and will be looking out for your best interest, not theirs.
·
If refinancing isn’t an option and the new
payment structure is going to be difficult for you to meet, proactively contact
your HELOC lender before the adjustment period to see what options they can
offer. While some lenders may work with you to make the repayment terms
more affordable, this is not guaranteed.
Navigating changes to your HELOC
can be difficult and an experienced Mortgage Banker can help you find the
answers to your specific questions. Contact
me to discuss your situation and how we can find a solution to meet your
needs.
