From now until 2018, many Home Equity Lines of Credit (HELOCs) borrowed during the housing bubble years of 2005 to 2008 will reach their 10-year end of draw period—and many of the borrowers will not be prepared for the payment shock they will be facing, according to a survey from TD Bank released on Tuesday.
The bank’s HELOC Reset Measure, which surveyed approximately 800 U.S. homeowners with HELOCs, found that nearly one-quarter (23 percent) of HELOC borrowers did not have a plan in place to handle increased payments once they reach their end of draw periods. The housing boom saw unprecedented numbers of HELOCs as homeowners looked for convenient ways to borrow in the midst of soaring home prices for major expenses such as college tuition, home improvements, and medical bills.
During the housing boom, many homeowners borrowed HELOCs to finance expenses such as home renovations, medical bills, travel/vacation, emergency expenses, and college tuition. With home values soaring, homeowners found HELOCs to be a convenient way to borrow or consolidate debt.
“Many HELOCs allow borrowers to draw for 10 years and make interest- only payments,” said Mike Kinane, SVP, Home Equity, TD Bank. “When this draw period ends, borrowers are required to pay principal and interest, which may increase their monthly payments. It's important that HELOC borrowers plan ahead and review their contract to determine the best course of action based on their current and future financial situations.”
The survey found that many HELOC borrowers were unaware of the HELOC reset date despite communication from lenders. More than half of respondents (53 percent) who borrowed HELOCs between 2005 and 2008 said they were unaware of how the reset will affect their payments.
Only 19 percent of survey respondents were aware that a HELOC reset meant that their payments will increase. Not only that, but misconceptions existed around the end of draw period—more than one-third (34 percent) of borrowers polled said they believe their payments will be reduced after a HELOC reset.
Not all borrowers with HELOCs were unprepared, however. More than one-quarter of survey respondents said they plan to refinance their HELOC into another loan, and nearly 70 percent of those borrowers said they plan to seek advice from their lenders.