Between now and 2018, up to 43% of US homeowners will be affected by a home equity line of credit reset — but according to a study by TD Bank, many are unprepared.
“Many HELOCs allow borrowers to draw for 10 years and make interest- only payments," said Mike Kinane, senior vice president of home equity at TD Bank. "When this draw period ends, borrowers are required to pay principal and interest, which may increase their monthly payments. It's important that HELOC borrowers plan ahead and review their contract to determine the best course of action based on their current and future financial situations.”
Many homeowners used HELOCs during the housing boom to finance large expenses like home renovations and college tuition. With home values soaring, HELOCs were a good way to consolidate debt. But now, with the 10-year interest-only period drawing to a close, many of these homeowners are going to see their payments spike. And a good many of them are unprepared, according to TD Bank.
The bank’s study found that 23% of surveyed homeowners didn’t have financial plans in place to handle the end of their draw periods. Many were unaware of the reset date described in their HELOC contracts, and just 19% understood that a HELOC reset would increase their monthly payments. Thirty-four percent thought a reset would actually reduce their monthly payments.
Perhaps more worrying, 60% of respondents who said they had no plan for their HELOC resets also said they had no plan to seek guidance from a mortgage professional.
“If borrowers do not have a financial plan for the end of their draw period they should contact their lender as early as possible,” Kinane said. “A responsive lender will offer multiple ways for you to pay down your line of credit.”