Borrowers who took out home equity lines of credit (Helocs) between 2004 and 2007 -- the top of the housing bubble -- can expect to see their monthly payments swell over the next few years. These equity lines usually have a 10-year period in which the borrower can use the line of credit and pay only interest, after which he or she must begin paying both interest and principal on the outstanding balance.
Most resets are expected from 2015 to 2017; but about $30 billion in outstanding Helocs will reach the end of the interest-only period this year, the Office of the Comptroller of the Currency (OCC) reports. Balances scheduled to reset will reach an estimated $52 billion in 2015 and $68 billion in 2017. According to Moody’s Investors Service, a homeowner with a $40,000 Heloc balance and a $210,000 home loan at 4 percent will be hit with an increase of nearly $300 per month when the equity line switches to a 10-year amortizing loan with an interest rate of 3 percent. Borrowers with equity lines that require balloon payments after the interest-only period will owe the full balance.
The OCC is concerned about a new wave of delinquencies and is encouraging lenders to assess their level of Heloc risk and reach out to borrowers before they fall behind. At the same time, homeowners with equity lines nearing the end of the interest-only period should be proactive in seeking help. They should review the terms of their equity line and determine their options if they are not sure they can make the new payment. At this time, it is uncertain how many Heloc holders have already defaulted on their loans and are out of the system, or what lenders may be doing already to get ahead of the problem.