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What to Do When a Home-Equity Line of Credit Comes Due

March 3,2017
For borrowers who took out a Heloc during the housing boom, the typical 10-year term is about to expire—and that may mean higher monthly payments
Many homeowners took out home-equity lines of credit during the housing boom, when property values soared. Now the typical 10-year term on these loans is expiring, and many people will be surprised that their monthly payments are about to go up—some, substantially.

“It’s been 10 years since they signed the loan documentation, and for a lot of our customers, it’s not top of mind,” says Mike Kinane, senior vice president of consumer lending at Cherry Hill, N.J.-based TD Bank.

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Home-equity lines of credit, called Helocs, allow homeowners to get funds, when needed, over the term of the loan as long as the amounts stay below the loan limit. Helocs are often used to cover major expenses, such as a home improvement or college tuition. Secured by a mortgage, the loans typically have a 10-year term and require only interest payments. After the initial 10-year period, the Heloc “resets,” and the principal becomes due. At that point, homeowners can choose to pay off the balance, refinance it into another first or second mortgage or make monthly payments of principal and interest, typically for a 20-year term.
According to Mr. Kinane, on a typical $50,000 Heloc at TD’s best rate of 3.25%, the interest-only payments during the 10-year draw period would be $135.42 a month. At the end of that term, the balance would be converted into a 20-year, fixed-rate loan with a 3.25% rate, with payments now including principal and interest. The homeowner’s new payment would more than double, to $283.60 a month.

‘It’s been 10 years since they signed the loan documentation, and for a lot of our customers, it’s not top of mind.’
—Mike Kinane, TD Bank
In August and September, TD surveyed 812 homeowners who currently have Helocs and found that 23% didn’t have plans in place to handle the end of their 10-year draw period. Only 19% of the respondents understood that a Heloc reset would increase their monthly payments.

“Some customers are a little surprised,” says Mr. Kinane. He added that TD reaches out to customers up to a year in advance to discuss options for the end of the draw period.

JUMBO JUNGLE TIPS

Here are a few things to consider if you have a Heloc about to reset.

• Give yourself time. Check the loan documentation to determine exactly how much longer you have on the draw period. If you plan to refinance the loan or take out another Heloc, start shopping around as early as possible. Banks are competing with each other for Helocs now, Mr. Kinane says, so they might offer attractive rates to get your business.

• Talk to the lender. If you are nearing the end of your 10-year term and are unable to increase your monthly payment or to refinance, talk to your lender about the best course of action for paying down your line of credit. Lenders can walk you through the other options available to you, such as a mortgage modification.

• Don’t use your house as a credit card. “Homeowners should be extremely careful when drawing upon a Heloc,” says Michael Silver, a certified financial planner with Baron Silver Stevens Financial Advisors in Boca Raton, Fla. “The equity in your home should not be used like an ATM—it should be used very sparingly and only for necessities.” Although the funds from a Heloc can be used for almost any purpose, Mr. Silver recommends using a Heloc for home improvements or tuition, rather than for frivolous purchases. Many homeowners also tap the funds to consolidate debt or purchase a car.

Housing prices peaked during the real-estate boom in 2006, which made Helocs attractive—and provided homeowners with lots of home equity to tap. Prices have risen since the housing crash and are approaching prerecession levels, according to real-estate data firm Black Knight Financial Services, which reported that in November (the latest month for which statistics are available), U.S. housing prices were within 0.3% of a new national peak. Still, there were 2.2 million homeowners underwater, or with negative equity, in November, and those who have Helocs may find it difficult to refinance.

Homeowners who are unprepared for the payment increase could find themselves in default, which could prompt the bank to take legal action to collect the balance or begin the foreclosure process.

“We focus on educating customers on how the product works, and we do the right underwriting to make sure they have the capacity to make those payments even at a higher rate,” says Henry Fulton, executive vice president of retail lending at Pittsburgh-based PNC Bank. He said that about 15% to 20% of PNC’s Heloc customers refinance when the loan resets, and the majority start making monthly payments of principal and interest to amortize the loan.