The home equity line of credit known as a HELOC has recently been in the news as millions of borrowers near their reset period. This is significant because of the way in which HELOCs differ from conventional home equity loans.
How HELOCs differ from conventional equity loans:
- Interest is variable and is based on prime rates
- Usually require interest-only payments prior to end-of-draw period
- Full principal repayment amount due at end-of-draw period
The very same factors that initially made them attractive may now be reason for concern.
With as many as 2.5 million HELOCs resetting in the next three years precautionary measures must be taken by mortgage lenders and borrowers. Particularly because they are considered a second mortgage and failure to repay can equate to foreclosure. The Office of the Currency (OCC) recently issued a report warning mortgage lenders to prepare for the resetting of millions of HELOCs, as a high percentage of borrowers could end up defaulting.
It is expected that mortgage borrowers could face potential challenges as their home equity line of credit nears the end-of-draw period. Borrowers might face difficulties due to the higher payments that result from principal amortization, interest rate resets, or renewal of existing loans due to changes in financial circumstance or declining property values.
Once these higher interest rates become effective there is a very real possibility that borrowers could end up defaulting, as the housing market has still not fully recovered. For the most part, homeowners got locked in before the recession hit, and up until now have only made small interest-only payments. Once the HELOCs reset they could be paying, depending on their individual loans, an estimated additional $250 a month.
The OCC urges that lenders communicate effectively with borrowers regarding the changes in payment that they will be experiencing soon. Additionally, mortgage lenders should establish outreach programs to notify borrowers of pending resets and help them with prudent underwriting. This could help make the transition much smoother for homebuyers.
If your HELOC is resetting soon and you have been notified by your bank of a substantial payment increase out of your budget, it is a good idea to get legal advise on potential solutions. An attorney specializing in mortgage loans and foreclosure defense is experienced in helping clients avoid foreclosure. Possible solutions include extending draw periods, modifying notes, and establishing amortization terms for existing balances. These solutions will typically be based on the mortgage lenders evaluation of the borrower’s willingness and ability to repay the loan.