Homeowners’ Monthly Payments Could Soon Double or Triple
During the months and years to come, many American homeowners will experience a massive increase in their monthly bills. A recent study revealed that the repayment phase will soon begin for millions of borrowers with home equity lines of credit. For some homeowners, this means that HELOC payments will increase by two to four times.
How it Works
The majority of HELOCs let borrowers withdraw money for a decade. During this time, they only need to pay the interest. The repayment phase brings an end to borrowing and requires homeowners to start paying back the principal. Most lines of credit were established between 2005 and 2008; over $260 billion will come due in the near future.
As monthly HELOC payments skyrocket, homeowners may undergo tremendous financial hardship. Many borrowers withdrew their entire credit limits years ago and haven't paid back any of the principal. Drastically higher bills might make it difficult to afford groceries, utilities and regular mortgage payments. This could result in a flood of defaults that creates serious problems for banks.
Most of this credit was issued at a time when real estate values were rapidly rising and unemployment remained low. Recent economic trends have left many homeowners unprepared for this development. The upcoming change in a monthly HELOC payment will vary based on several different factors. It depends on the rate, remaining balance and loan term.
As The Fiscal Times points out, these increases have the potential to destroy family budgets. It reports that people currently pay around $330 per month on $100,000 lines of credit. After the interest-only phase ends, this bill jumps to about $740. A person would have to work an extra 46 hours at $9 per hour to compensate for the difference.
Another problem with HELOCs is that they usually have adjustable interest rates. Fortunately, it's possible to refinance a line of credit into a fixed-rate loan or another HELOC. Some homeowners may also have the opportunity to consolidate a HELOC and a mortgage into one loan. The problem is that these solutions require considerable home equity and/or high credit scores.
With few ways to avoid burdensome payments, some borrowers will have no choice but to default. Bloomberg reported in August 2014 that only about one-quarter of HELOCs issued by Bank of America had entered the repayment phase. The lender's data indicated that missed payments are three times more likely to occur after this period begins.
Approximately $23 billion worth of HELOC loans came due during 2014. This figure is expected to gradually increase for about three years. The federal government believes that more than twice as many HELOCs will enter the repayment phase during 2017. Over 50 percent of the balances exceed $100,000, according to Bloomberg.
The situation is made even worse when lenders demand balloon payments as the interest-only phase comes to an end. This means that borrowers must immediately repay the entire principal. Wells Fargo is one bank that supplied HELOCs of this type. Banks are only willing to convert these payments into new loans if homeowners have sufficiently high incomes and credit ratings.
On the bright side, some lenders may modify the terms of HELOCs if homeowners can't afford the higher payments. This is true because they could lose all of the money by foreclosing on homes that have lost considerable value in recent years. If a property's resale value has fallen below the mortgage principal amount, the HELOC funds can't be recovered.
During the past few years, government agencies and lenders have reached punitive settlements that mandated more loan modifications. Some homeowners with lines of credit may be able to benefit from this. Other possible solutions include selling the property or declaring bankruptcy. A short sale may prove necessary if the home is worth less than the associated credit.
Although these strategies provide effective solutions for some borrowers, it still appears likely that defaults will rapidly increase. This could lead to another wave of economic hardship, evictions and homelessness. It may also produce considerable losses for banks, though few homeowners will feel sorry for the industry that created this situation through reckless lending and fraud.
Are you one of those affected or soon to be drastically affected by this HELOC repayment phase? You may be needing professional help in restructuring your finances and eventually getting rid of all mortgage debts totally. You can call us today at 866-4-WAY-OUT (866-492-9688) or leave us a message and we'll get back to you.
Find out about your options today before things start to become hard. The earlier you plan your way out, the better the position you'll be in, in the future.