Many Borrowers Unaware Higher Payments Coming
December 8, 2016
Borrowers with home equity lines of credit (HELOCs) may unexpectedly find their monthly payments rising. Mortgage rates have been on the rise, and while that doesn’t impact borrowers with fixed-rate mortgages, those with adjustable rates are seeing sudden increases. HELOC borrowers in particular, have adjustable rates on these second loans, and the payments change once a year.
Read more: Defaulting HELOCs: A Growing Concern
Originations of HELOCs reached a peak in 2005 at $367 billion. Their popularity dwindled significantly the last few years, but as home prices have recovered, borrowers have equity again and HELOC originations are gaining ground. HELOC originations are estimated to reach $173 billion this year.
For borrowers who use the line of credit, they likely will see higher monthly payments as interest rates rise. Those increases could amount to an extra $100 more per month. However, the increase is dependent on the size of their loan.
"For those that have a high balance, clearly their payment will increase, and it will cause some prepayments" Sam Khater, an economist with CoreLogic, told CNBC. "But rates simply reflect the supply and demand for money, and that is the growth rate in the economy."
Many HELOCs from the housing boom days had a 10-year draw period, when borrowers only paid the interest on the loan and then made payments toward the principal after that. HELOCs today often require some principal payments from the onset.
Borrowers may be unaware that their costs could soon increase. Only 19 percent of 800 borrowers recently surveyed by TD Bank understood that a HELOC reset could cause their monthly payments to stretch higher. Of HELOC borrowers from 2005 to 2008 who now have their loans resetting or within the next two years, 53 percent said they were unaware about any reset impact to their monthly 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."
Source: “One of Your Monthly Housing Bills May Get Bigger,” CNBC (Dec. 7, 2016)
Updated: May 29, 2020