The bad news is that HELOCs have a short shelf life (typically 10 years), after which the balance is either due in full or the interest rate skyrockets. Any outstanding balance at the 10-year mark converts to the repayment term (known as the reset), where borrowers generally pay the principal and interest over a 20-year period.
HELOCs taken out during the pre-crash boom generally were sold as a way to make your house the one of your dreams. But those salad days were 10 years ago and the check is coming due. For ill-prepared borrowers running on tight budgets or still trying to recoup the losses of the recession, those once-golden HELOC terms can be troublesome to say the least.
In raw dollars and cents, take this example from Bankrate: A $30,000 balance at 3.25 percent interest (the current prime rate) equals a minimum payment of $81.25. But after the 10-year mark, that balance resets to a 20-year repayment schedule and the minimum due each month bloats to $170.16.
Sound like small potatoes? It’s not. Not to the borrower who can’t swing that extra 90 bucks a month. Not when you add it to an existing mortgage or take into account the fact that many borrowers spent way more than $30,000 from their HELOCs.
Compounding this is the potential for another recession aftershock. Data indicates the roughly 3.3 million outstanding HELOCs that exist right now add up to about $158 billion. And just over half of those due to reset over the next four years are attached to homes that are under water.
Greg McBride, chief financial analyst at Bankrate, however, doesn’t see the lurking HELOC crisis as a systemic problem. Certainly nowhere near the order of the housing crash, not just for the comparatively small amount but because the resets will be spread out over time. “But that’s of little consolation to the borrower who doesn’t see this coming,” McBride told MReport Tuesday.
For that borrower, a HELOC default could trigger a foreclosure, particularly if that borrower has solid equity in the home. “A HELOC is a loan secured by the home,” he said. “These are not obligations you can walk away from.”
The good news is that HELOC borrowers have options. McBride told MReport that the best way to avoid trouble is to be proactive. In other words, talk to your lender before the you get into too-deep water. One option is to refinance the first mortgage to include the HELOC while interest rates are still so low. Another is to refinance the HELOC itself. Many lenders, he said, will help borrowers who “get out in front of it, rather than burying their heads in the sand and hoping the problem goes away.”
But one last caveat. Refinancing a mortgage or a HELOC is still borrowing with obligation. “You’re really just kicking it down the road,” McBride said. “Sooner or later, you’re going to have to pay it back.”