Homeowners who have home equity lines of credit, called HELOCs, could be in for a nasty shock when their monthly payments increase suddenly. Mortgage rates have been rising for a while, and while this doesn’t impact borrowers on fixed-rate mortgages, those with adjustable rates will see an increase. This is a particular issue for HELOC borrowers, who have adjustable rates on these second loans that see payments change once a year.
CNBC reports that originations of HELOCs hit their peak at $367 billion back in 2005. Since then the popularity of HELOCs has dropped significantly, but with the real estate market now recovering, borrowers are looking at them again. It’s reckond that HELOC originations will hit $173 billion this year.
Any borrower who has taken the option to use this line of credit will soon see increases in their monthly repayments as interest rates rise. These increases could amount to $100 a month in some cases, dependent on the size of the loan.
"For those that have a high balance, clearly their payment will increase, and it will cause some prepayments" said Sam Khater, an economist with CoreLogic, in an interview with CNBC. "But rates simply reflect the supply and demand for money, and that is the growth rate in the economy."
A large number of HELOCs that pre-date the housing boom had what’s called a draw period of 10 years, which is where they’re allowed to only pay the interest on the loan, before making payments towards the principal after that. Today’s HELOCs generally require payments on the principal to be made from the onset of the loan.
The biggest concern is that many borrowers seem to be unaware that their repayments are about to increase. In a recent survey of 800 borrowers by TD Bank, just 19 percent understood that their monthly payments would increase after a HELOC reset. Moreover, 53 percent of HELOC borrowers from 2005 to 2008 – whose loans will reset within the next two years – indicated that they were unaware this would affect their payments.
"If borrowers do not have a financial plan for the end of their draw period, they should contact their lender as early as possible," Mike Kinane, senior vice president for home equity at TD Bank, told CNBC. "A responsive lender will offer multiple ways for you to pay down your line of credit."