6 things to know before your Home Equity payment comes due - Newschannel 6 Now | Wichita Falls, TX

6 things to know before your Home Equity payment comes due

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By Andrew Housser

Beginning in 2005, up until the housing collapse in 2008, millions of people tapped into their home equity via a home equity line of credit, or HELOC. Some people used HELOCs as a “piggyback” loan to avoid paying private mortgage insurance, or PMI. Others spent the cash on home improvements, paying off credit card debt, or other purchases.

Now, those loans are entering their repayment period. The resulting higher payments could cause financial problems for these homeowners. If you are among them, here is what you need to know about your HELOC.

1. Understand your HELOC.

The first step is to unearth your loan paperwork and understand what kind of loan you have. HELOCs are designed to be used like a traditional line of credit. The borrower can use some of the credit, and then repay that amount. Most HELOCs have a “draw period” for the first five to 10 years of the loan term. During this time, the borrower may borrow, repay and borrow again as needed. After the draw period years, the loan enters its repayment period. Some loans have a fixed payment schedule for 15-20 years. Other loans require a lump-sum payment of any outstanding amount.

2. Know what you owe.

Many borrowers have used a HELOC like a traditional second mortgage. They withdrew cash, and used it, rather than writing checks against the available credit and repaying it over time. Many banks begin reaching out several months ahead of time to explain payment terms and options. If yours has not, check your paperwork or contact the lender to learn your current balance. If you receive mail from your HELOC lender, be sure to open it and read it carefully.

3. Calculate your payment.

Most HELOCs charge interest based on the prime rate. During the draw period – the first five to 10 years of the loan term – you might have been required to pay only interest. For the 15-20 year repayment period, you will most likely be required to pay principle plus interest. When your HELOC balance enters its repayment period, your monthly bill could rise notably. For example, if you owe $50,000 on a HELOC, at 6 percent interest, your payment might nearly double, from $250 per month paying interest only, to $458 per month as you begin to repay the principle. This bill could rise even more if the prime rate increases (and your associated interest rate with it).

4. Consider refinancing the loan.

If you cannot pay off your HELOC, and you have sufficient equity and good credit, you might be able to refinance into a new mortgage that incorporates the HELOC plus your remaining mortgage balance. However, a report issued in March found that 56 percent of HELOCs that will reset from 2015 to 2018 are on homes that are underwater, meaning borrowers owe more than the value of the home. Most of these loans will not qualify for refinancing.

5. Ask your lender about options.

If you owe a lump sum, and refinancing is not an option, reach out proactively to your lender. Sometimes, banks will extend the loan term to make repayment possible.

6. Do not ignore the problem.

It is true that a HELOC is a second mortgage. These loans are usually subordinate to the first mortgage, but it is possible that a second mortgage lender could force a foreclosure if you default on the loan. The bottom line is to make sure you take action to determine the state of your HELOC, and what your payment options will be.

A HELOC can be – and has been – a very useful tool for many homeowners. From a lender's perspective, a HELOC is a reliable loan because it is secured by the collateral of your home. However, that means that if you run into problems repaying the HELOC, you could put your home at risk. That is why it is smart to be proactive in understanding and resolving the repayment of your home equity line of credit debt.



Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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