Reprinted from Reverse Mortgage Daily written by Jason Oliva
Do you have a HELOC loan on your property? A large number of U.S. homeowners will be affected by a Home Equity Line of Credit (HELOC) reset over the next few years. Additionally, many borrowers are either unprepared or unaware of the financial repercussions awaiting them, a recent study indicates.
Of more than 800 polled homeowners holding HELOCs, 43% will be affected by a reset in the coming years. This information stems from the TD Bank HELOC Reset Measure released this week. And as HELOC borrowers reach their end of draw periods, 23% of survey respondents said they do not have financial plans in place to handle a reset.
Feeding into this unpreparedness were misconceptions borrowers hold regarding HELOC repayment. Only 19% of respondents to the TD Bank survey understand that a HELOC reset will increase their monthly payments. Meanwhile, 34% said they believe their monthly payment will be reduced when their HELOC resets.
Additionally, TD Bank found that one third of borrowers who opened HELOCs prior to 2011 are unaware of their draw period expiration date described in the HELOC contract. This number rises among Baby Boomers to 42%.
Meanwhile, 53% of respondents who opened HELOCs between 2005 and 2008 don’t know the impact the reset will have on their monthly payments.
HOW A HELOC WORKS
Many HELOC loans allow borrowers to draw for 10 years and make interest-only payments, said Mike Kinane, senior vice president in TD Bank’s Home Equity division.
“When this draw period ends, you are required to pay principal and interest. This may possibly increase your monthly payments,” Kinane said. “It’s important you plan ahead and review your contract to determine the best course of action based on your current and future financial situations.”
However, the vast majority of respondents (60%) who do not have a plan for their HELOC resets indicated they will not seek guidance from their lenders.
WHAT TO DO
“If you do not have a financial plan for the end of your draw period you should contact your lender as early as possible,” Kinane said. “A responsive lender will offer multiple ways for you to pay down your line of credit.”
But for borrowers who are prepared to face HELOC resets, more than one-quarter of respondents said they plan to refinance their HELOC into another loan. And almost 70% of those borrowers plan to approach their current lenders.
For those borrowers considering a refi, using a HELOC for emergency funds was most important to them (35%). Home renovation followed (27%) and travel (26%).
With home values soaring during the housing boom, homeowners sought HELOCs as a means for tapping into their home equity. Moreover, HELOC loan funds are typically used to finance a variety of expenses. Home renovations, medical bills, even help with debt consolidation are among the top uses.
In the TD Bank survey, the top three reasons homeowners opened a HELOC were to renovate a home (38%), consolidate debt (24%) and purchase a new vehicle (20%).
“HELOCs can be a smart and flexible way for you to tap money when needed. Most uses are for home renovations, debt considation, education, or deal with unexpected expenses,” Kinane said. “It’s a wise idea to consult with your banker, and take advantage of the benefits that HELOCs can offer.”
If you are 62 and over, you may be able to remedy this situation with a reverse mortgage on your home. Once you have this, the reverse mortgage will pay off your HELOC.
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