Many of you, over the years, have taken out equity lines of credit (HELOCs) on your homes. HELOCs are great in that you only pay interest on the amount you use and in almost all cases you are only obligated to make “interest only” payments. HELOCs are great for home improvement projects, debt consolidation, college tuition, etc. And the interest you pay is usually tax deductible. This is all great.
But what a lot of borrowers don’t realize is that most HELOCs are written for 25 year terms. The first 10 years of the loan, the borrower may access their credit line, pay it down, access it again, etc. And during that 10 year period they are only required to pay back the interest. However, what happens after 10 years can be quite disturbing. First, after 10 years the borrower can make no more draws against the available line of credit. And, after 10 years, in most cases, the borrower must start making fully amortizing payments over the balance of the term or 15 years. So, the minimum payment goes from a low interest only amount to a 15 year fully amortized payment. This can create a substantial increase in monthly payment, especially on HELOCs with balances above $150,000 For example, on a balance of $200,000, assuming an interest rate of 4%, the interest only payment would be $667. When the loan “recasts” at the end of 10 years, assuming the rate is still 4%, the payment will jump $812 to $1,479. Then, if rates increase, which is almost certain, the payment will increase again. If the Fed moves 1%, the HELOC will also move 1% and the new payment at 5% would be $1,581.
If you’ve had your HELOC for 8-9 years, now might be an excellent time to combine your 1st mortgage and your HELOC into a new fixed rate loan. That will enable you to avoid the sharp increase on your line of credit while taking away the uncertainty of future interest rate hikes. Give us a call and we’ll go over your options with you.