Will the resetting of millions of home equity lines of credit (HELOCs) over the next couple of years result in a wave of defaults?
That’s a question many people in the mortgage industry have been wondering for the past several years. And although it is mostly hinged on the overall health of the economy, a new report from TD Bank shows that the threat of a HELOC default tsunami is very real.
According to TD Bank’s first-ever HELOC Reset Measure, about 43% of U.S. homeowners with HELOCs will be affected when these loans reset. And of these homeowners, about 23% are unprepared for the resulting increases in their monthly payments. And of those folks who do not have a plan for handling the increase, about 60% say they will not reach out to their servicers or lenders for help.
The survey shows that many HELOC borrowers don’t even know the reset date described in their contracts despite communications from lenders. In fact, only 19% of respondents understand that a HELOC reset will increase their monthly payments, and more than half (53%) don’t know the impact the reset will have on their monthly payments.
TD Bank polled 800 borrowers with HELOCs to arrive at the findings.
“Many HELOCs allow borrowers to draw for 10 years and make interest-only payments,” says Mike Kinane, senior vice president of home equity for 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.
“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 adds. “A responsive lender will offer multiple ways for you to pay down your line of credit.”
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This survey provides a much needed reminder that just because the earthquake hasn’t happened yet, the fault line is still there. It’s eventually going to give, and only those who had already moved safer ground when it does are going to survive.
There is still time to reach out to at-risk HELOC borrowers before their reset hits, but it’s running out.