Homeowners who opened home equity lines of credit (HELOCs) in 2004 will have to start paying back those loans this year though there are still concerns about how many people will be able to make the payments.
Home equity lines of credit were aggressively marketed during 2004-2007 just prior to the financial crisis. These types of loans have a 10-year period during which the borrower only has to pay back the interest. The allure of these types of loans was that the borrower had access to a large volume of money with a low variable interest rate.
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But for borrowers who took loans out in 2004, they’ll soon have to start making payments on both the interest and the principal. For borrowers with HELOCs valued at 40,000 with a 4% interest rate this will mean paying an additional $286.00 every month once the equity line becomes a 10-year amortizing loan.
Angst for Homeowners
The prospect of having to pay an extra several hundred dollars every month on top of a mortgage, car loans, credit card bill and student loans will come as a shock for many. Unemployment still isn’t anywhere near it was in 2004 and wages have largely remained stagnant.
This has prompted the Office of the Comptroller of the Currency to proactively reach out to lenders and determine the level of risk that is posed by borrowers with HELOCs. Meanwhile the comptroller’s office is urging consumers to come forward as soon as possible if they believe they will have difficulty paying back their loan. “Borrowers should raise their hand very early and expect to be helped,” said Allen J. Jones, a managing director of RiskSpan, a mortgage consulting firm in Washington.
Repaying a HELOC
No one wants to be stuck in a situation where they are unable to pay back their loan. So, if you have a HELOC and are worried about being able to pay it back (or if you just want to save money in the process), here are some of your options.
First, find out if you have equity in your home that can be used to refinance out of your HELOC. If the value of your house has appreciated since you last took out your loan then this may very well be possible. Homeowners who live in southern California or other expensive real estate markets should pay extra close attention to this option.
If you aren’t able to do this then you might want to start thinking about forbearance. Forebearance allows homebuyers to temporarily get their payments reduced or even suspended for a given period of time. Allen J. Jones, a managing director of RiskSpan, a mortgage consulting firm in Washington, says that lenders look at each borrower individually when determining whether to change the terms of a HELOC. “Just like with loan modifications, there can be a modification to a Heloc,” he said. “All lenders will look at this differently from the perspective of the borrower’s situation, but it starts with the borrower understanding where they are.”
The bottom line is that it pays to act quickly when dealing with a HELOC. It becomes increasingly more difficult down the road to get help if you’ve already fallen several payments behind. Refinancing may be a better option.
