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Welcome To Hell(ocs)! Home Equity Loans Come Back to Haunt Borrowers, Banks

anthonybsanders.wordpress.com | August 24, 2016

By Anthony B. Sanders

A home equity lines of credit (or HELOC) is a loan, using your home as collateral, that lets you borrow up to a certain amount, rather than a set dollar amount. A HELOC acts like a credit card: It has a credit limit, and you can borrow against it, pay all or part of the balance, and borrow again up to the credit limit. The interest rate varies with the prime rate.

But many HELOCs were interest-only for the first 10 years, but interest plus principal for the next 15-20 years kicking up the monthly payment due.

According to the Wall Street Journal,

“The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks.

More homeowners are missing payments on their home-equity lines of credit, or Helocs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years.

The increased cost of the loan can become a strain for some borrowers. This is becoming an issue now because many borrowers signed up for Helocs in the run-up to the housing bust as home values kept rising. Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.

Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax. That represents 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% before the reset.”

As of Q1 2016, HELOC charge offs had declined to pre-crisis levels. But the NON-current rate for HELOCs has remained over 2.5% since 2012.

So, here we go as interest-only HELOCs payment suddenly convert from IO to principal pay down as well. Making the HELOC payment increase.

And with HELOCs, it is not “Who are you?” but “WHAT are you?”

 

 

 

 

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