If you thought the last hangovers from the housing boom were all over with, guess again. There may be more punishment coming from the real estate excesses of a decade ago - especially if you have a home equity line of credit (HELOC).
Fortunately, you have options for dealing with this particular hangover - especially if you see it coming rather than waiting until it strikes.
The HELOC problem
HELOCs soared in popularity during the housing boom. Fast-rising home prices boosted the value of equity in people's homes, which many homeowners treated like found money. Plus, the strength of the real estate market gave borrowers and lenders alike confidence in the safety of borrowing against that newly-created equity.
All of this occurred more than ten years ago and may become a problem now. Many HELOC provisions allowed borrowers to pay only the interest on their loans for a period of ten years, after which the borrower has to start making principal payments. This "reset" in repayment terms can significantly raise monthly payments - in some cases to the point where borrowers may not be able to keep up.
Because the popularity of HELOCs peaked during the housing crisis, the reset periods that occur ten years into these loans is likely to peak in 2017. This is expected to lead to an unprecedented volume of payment resets. If you started a HELOC during the housing boom, make sure you know what is coming and prepare possible remedies.
Potential HELOC reset remedies
The jump from interest-only payments to interest plus principal can be severe. How can you prepare? Here are some things to consider:
- Budget anticipation. Look at the terms of your HELOC to see when it is due to reset and how this will affect payments. Then look at your budget to see if you have sufficient income to afford the higher monthly payments, or perhaps enough savings to pay off some or all of your balance.
- Refinancing with a fresh HELOC. If you anticipate trouble meeting your reset HELOC payments, one option is to refinance with a new HELOC through your existing or new lender. However, if you do this be sure to start saving up to make the inevitable principal payments when your new HELOC hits its reset period - otherwise you could just be delaying this problem's resolution, and racking up additional interest payments in the process.
- Cash-out refinancing. Refinancing your existing mortgage while taking enough cash out of the loan to pay off your HELOC can make payments more manageable by stretching them out over a long period of time. Cash-out refinancing makes the most sense if mortgage rates now are lower than those on your existing mortgage loan; otherwise, this could end up costing you more on your entire mortgage debt.
- Home equity loan. If mortgage rates now are higher than those on your existing mortgage, you may want to leave that loan in place and take out a home equity loan to pay off the HELOC. This could help by stretching payments out over a longer time.
The key here is not to be blindsided by the HELOC hangover. Anticipating it should help you weigh your options and find the best solution for your needs.