Another Pre-Recession Housing Problem is Coming: Part 1

The home equity line of credit (HELOC) gained popularity in the early 2000s, even though it had been around long before that. Today, lending institutions aren’t issuing as many HELOCs because of the 2008 financial crisis. Although, millions of homeowners across the nation still have a HELOC and will be surprised when it reaches its 10-year reset point in 2015-16.

While there are various types of HELOC agreements, most are under a 25-year contract with a 10-year borrowing period and a 15-year repayment period. If you received a HELOC in 2005 under these conditions and borrowed $50,000, you’ve likely only been paying interest at 6 percent. Although this a relatively high rate, your payment is affordable because you’re only paying interest on the principal.

As your 10-year borrowing period nears (following the 2005 example), your HELOC’s line of credit will expire and your payments will increase during the repayment period to repay the principal balance plus the ongoing interest. At 6 percent annual interest rate, you payment will almost double.

To make matters worse, some HELOC agreements were set up under 15-year contracts. In this case, the borrower would have a 10-year borrowing period and only a 5-year repayment period. This short time period to repay the principal means your monthly payments could almost quadruple after the reset.

Unfortunately, HELOCs were designed under the premise that real estate would continue to increase, allowing qualified borrowers to refinance with better terms within a few years. The decrease in real estate values left millions of homeowners unable to refinance and vulnerable to hefty payments when their HELOCs reset.

For more information about your home equity line of credit and its terms, contact a real estate attorney. He or she will be able to help you resolve this issue.