Home-equity credit deadlines approaching

Originally published in the Clarion-Ledger print edition on April 15, 2015.

During the days of easy credit a decade ago, many consumers took out home equity lines of credit (HELOCs) to have some needed cash to make home improvements, pay for college, or even buy luxury items or travel. It seemed like a good idea at the time; home values were at historical high rates, and credit terms were loose. When the loan came due, you could just refinance. Banks made it quick and easy to apply to get at this pile of money, just sitting unused in the value of your home.

But now, as many HELOCs taken out during the middle 2000s are reaching the 10-year mark, many consumers may find that a nasty surprise awaits; the end of the “draw period” also means that the loan ceases to be “interest-only”, and the loan payment may suddenly increase to double or more of what you’ve been paying. The HELOC – which once looked like a ready-and-willing ATM – has morphed into a fully-amortized, adjustable-rate mortgage.

That means that a lot of consumers will be facing the harsh realities of paying that suddenly-higher note. Refinancing may still be an option, but since home values have shifted considerably during the past few years, credit restrictions have tightened and incomes have struggled to match rising prices, consumers may find their options are more limited than before.

In simple terms, a HELOC is a line of credit based on your home’s equity; they’re considered second mortgages. If you have equity in your home, a bank will loan you a percentage (with your home as collateral), with the stipulation that you pay the interest only during an initial period (often 10 years). And you can use the remaining value of the HELOC during the draw period to get needed cash; many homeowners use it as a “cushion” against financial emergencies.

According to some sources, as many as half of current HELOCs were taken out between 2004 and 2006, causing a lot of concern with the expiration of the 10-year draw periods that’s happening now. Some have likened all this to a “ticking time bomb”. Although that may be a little dramatic, regulators are concerned. Last year, the Federal Reserve issued a white paper with guidance for lenders in dealing with the impending changes.

“[Regulators] recognize that financial institutions and residential mortgage borrowers may face challenges as home equity lines of credit (HELOC) near their end-of-draw periods,” noted the agency. “As HELOCs transition from their draw periods to full repayment, many borrowers will have the financial capacity to pay as agreed. Some borrowers, however, may have difficulty meeting higher payments resulting from principal amortization or interest rate reset, or renewing existing loans due to changes in their financial circumstances or declines in property values.”

If you have a HELOC, it’s a good idea to dig out your paperwork and find out when your draw period ends. Bankrate.com suggests exploring these options with your lender:

  • Refinance the HELOC into a new one.
  • Refinance the HELOC with a straight home-equity loan.
  • Roll your remaining HELOC balance into a refinance of your primary loan. (Remember, interest rates are still near historic lows.)

And if your payment has mushroomed and you find you can’t handle it, don’t lose your home; ask for help from a credit counseling service.

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