Yikes! Don't Get Caught When Equity Home Loans Adjust
Over the next four years, more than $221 billion in HELOC loans held by the biggest banks will cross the 10-year mark, an adjustment that could jack up monthly payments three-fold. Refinancing is an option, if you plan.
We're at the numbers board again. Unlike the northerly trend in home values reported over the last several years -- we can agree it's a rebound, even with the necessary corrections, yes? -- this is debt that's played a role in the background. It's now moving in for a close-up.
Those popping sounds you hear are loans adjusting. Rounding the bend is the 10-year anniversary of the home equity lines of credit (HELOC) that were a significant feature of the past real estate party. About $221 billion, or 40 percent of these loans currently outstanding, will experience cold recalculations lasting until 2018. What does this mean for home owners? If you're one of the millions that borrowed against the equity in your home during the boom and used interest-only financing to remodel a kitchen, rehab a bath, or other less flattering, less home-improvement related investments, these loans are making an historic adjustment that could steamroll you.
With the Fed's promise of rate hikes as early as 2015, payments of the principal plus interest, could have consumers paying a monthly bill three times higher, a huge expenditure many just didn't prepare or plan. Big banks -- Wells Fargo, Citigroup, JPMorgan Chase and Bank of America -- each count multiple billions of these loans on the books.
When you recall that these loans were aggressively marketed to subprime borrowers it raises the specter of crisis-level of defaults -- massive delinquencies. It's an ugly melt-down sequel which lenders want to avoid.
Play it smart, starting with a thorough revisit to your loan contract. For instance, was your loan structured as 10 years of interest only payments, followed by repayment over 10, 15, or 20 years? Is the whole enchilada coming due? (It can happen, that's why you have to dust off the contract and read it with a magnifying glass.)
Many banks are willing to work with you and reconfigure repayment. (True.) According to Reuters, Bank of America is contacting consumers early, sometimes a year in advance of the adjustment, to discuss a workaround.
And don't forget refinancing. Continued strong economic growth and increasing home values could make it a prudent solution, but you have to make the call first.