Understanding Your HELOC and Repayment: What You Need To Know

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.

4 Important Questions To Ask Before Refinancing Your Mortgage

So you are thinking of refinancing? Well you are in luck because I have 4 quick and important questions you should ask yourself before doing so.

1) Do I Have Enough Equity To Get A Mortgage?

To get a conventional loan, you will usually need to have at least 20 percent equity. This means that your house will have to be worth at least $250,000 to get a $200,000 loan.

If you have less equity, you could end up having to pay for private mortgage insurance, which can easily add $100 or more to your monthly payment.

2) How's My Credit?

Most lenders will look at your credit score as a part of determining whether or not to make you a loan. With conventional lenders, your rate will depend on your score and the higher it is, the lower your payment will be.

Other lenders, like the FHA and VA programs have an all or nothing rule. If you qualify, your rate won't be based on your credit, but if your score is too low, you won't be able to get any loan. Generally, 620 credit scores are the lowest that will qualify you for any loan.

3) What Do I Want To Accomplish?

Mortgages typically offer a choice as to their term. While the 30-year loan is the most popular, shorter term mortgages save you money since you pay less interest over their lives. They also get you out of debt sooner, at least as regards your house.

The drawback is that they carry higher payments since you pay off more principal every month. This can make them less affordable for some borrowers, generally, you'll need to keep your current house and loan for anywhere from three to six years to break even on the costs of refinancing.

4) How's My Current Loan?

If you have an adjustable rate mortgage, you may want to switch to a fixed rate mortgage simply for the additional security it offers you. On the other hand, if you are planning to move relatively soon, your current mortgage could be a better deal whehter it's fixed- or adjustable-rate.

When trying to decide what to do, compare the cost of refinancing with what it would cost you in additional interest to hold on to your existing loan. While the breakdown is different for every borrower, generally, you'll need to keep your current house and loan for anywhere from three to six years to break even on the costs of refinancing.

Deciding what to do with your mortgage can be complicated. Working with a qualified loan broker that can consider every angle with you can help you to make a better decision.