Understanding Your HELOC and Repayment: What You Need to Know

During the housing boom of the early 2000s, Home Equity Lines of Credit (HELOC) were originated at a record pace. A HELOC is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house.  In particular, between 2004 and 2008, a significant number of HELOCs with terms of 10 years were created. The draw period for these lines of credit are coming to an end, evoking conversation on what happens now.

Here is a brief summary of important facts anyone with an existing HELOC should get familiar with:

• All terms of your HELOC are outlined in the documents you signed when opening your account and should be reviewed to gain familiarity. In particular, read through your HELOC Agreement.  
• Your interest rate is adjustable and is tied to the prime rate. The prime rate is a commonly used, short-term interest rate used by most banks in the United States. The rate on your HELOC is typically adjusts as the prime rate rises and falls.
• The prime rate is currently 3.25%. This rate is not static and is subject to change.
• Rates are expected to rise sometime in the next year or two.
• All HELOC’s start with a draw period during which the borrower can access the funds on the line of credit.  Typically, the minimum payment during this time frame is interest only, although in some cases it may be a percentage of the outstanding balance.

Which changes can you expect to come to your repayment terms now that your line of credit is amortizing?

• The initial draw period for HELOCs opened in the 2004-2008 time frame was ten years, in most cases. Some have already moved beyond the draw period and millions more will be doing so within the next few years. Make sure you know when this will happen in your case so you can prepare for it in advance.  DON’T JUST WAIT FOR YOUR HELOC LENDER TO INFORM YOU.
• At the end of the draw period, the minimum payment requirements change, sometimes drastically, as the HELOC enters the repayment term and funds can no longer be accessed from the Line.  
• The payments required after the draw period are recalculated so that the balance can be paid off in a specified period of time.  Check your HELOC Agreement to know how long this time period will be.  It is likely to be 5, 10, or 20 years.
• The shorter that time frame for repayment is, THE MORE YOUR PAYMENT WILL BE GOING UP.  For example, you’d have to pay a lot more each month to pay down the balance in 5 or 10 years than you would to pay if off in 20.

So what should you do?

• Read your HELOC Agreement and get familiar with the terms.
• Use an online calculator or ask a Mortgage Banker to determine what your payment will change to based on your balance, interest rate, and the length of the repayment term.
• Consult with your trusted mortgage advisor to see if there are options to refinance that make sense for you to consider.  Make sure you consult with someone who will give you an honest answer and will be looking out for your best interest, not theirs.
• If refinancing isn’t an option and the new payment structure is going to be difficult for you to meet, proactively contact your HELOC lender before the adjustment period to see what options they can offer.  While some lenders may work with you to make the repayment terms more affordable, this is not guaranteed. 

Navigating changes to your HELOC can be difficult and an experienced Mortgage Banker can help you find the answers to your specific questions. Contact me to discuss your situation and how we can find a solution to meet your needs.