Although the home equity line of credit (HELOC) has been around for many years, it gained popularity in the early 2000s. Far fewer HELOCs are being issued by lending institutions today due to the 2008 financial crisis, but millions of homeowners still have this type of arrangement, and are in for a shock when these HELOCs reach their 10-year reset points in 2015-2016.
While there are many different types of HELOC agreements, a common arrangement is the 25-year contract, with a 10-year borrowing period and a 15-year repayment period. This means that if you received a HELOC in 2005 that followed this structure, and borrowed $50,000 on your house this whole time you've been paying interest-only at 6%, which is high compared to today's rates, but since you are only paying interest on the principal balance, the payment is still manageable at only $250 per month.
At the end of your 10-year borrowing period (which would be this year, following the 2005 example) the line-of-credit feature of the HELOC will expire and the payments will then increase during the repayment period to cover repayment of the principal balance (plus ongoing interest). At a 6% annual percentage rate, the $250 per month payment will suddenly spike to just under $500 and remain at that level until the $50,000 is paid off (assuming you have a fixed interest rate).
Even worse, some HELOC products were set up for a total contract duration of 15 years, which just entails a 10-year borrowing period followed by only a 5-year repayment period. This short period of time to repay principal means that the monthly payment in the above example would increase to $967 after the reset, which almost four times the original payment!
How could such a seemingly terrible program gain such popularity? When HELOC and similar financial products were designed, they were based on the crucial assumption that real estate values would continue to rise, which would allow qualified borrowers to refinance to more favorable terms within a few years. However, the financial climate has remained stagnant, meaning that the HELOC reset is going to be a bigger problem than initially imagined. The steep plunge in real estate values has left millions of homeowners unable to participate in traditional refinancing programs, leaving them vulnerable to a major payment shock when their HELOCs reset in 2015 and beyond. Since so many HELOCs were issued in 2004 through 2008 compared to prior years, this HELOC reset crisis will potentially hamper America's continued housing recovery for years to come.
Stephen K. Hachey, a Florida foreclosure attorney, can help your wade through this process and determine a positive solution. Contact him at 813-549-0096.
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