HELOCs – The Next Bubble?

This article is from Scotsman Guide called “Finding the Key to Mitigate HELOC Risks.”  If you have a line of credit, now is the time to refinance it while rates are still low.

“According to Moody’s Investors Service, there was an outstanding balance of $552 billion worth of HELOCs in the entire financial system at the end of this past first quarter, with $486 billion of credit available to be drawn down.

Many HELOCs had 10-year interest-only periods, which means that some of these credit lines will convert to amortizing loans starting in 2014. In fact, according to the OCC’s Spring 2012 Semiannual Risk Perspective, about 58 percent of all HELOC balances are due to start amortizing between 2014 and 2017, with an almost 100 percent increase in 2014 compared to this year.”

The biggest problem with this is that most HELOCs are interest only and the majority of people only make the interest only payment and do not pay down any principle.

“Many HELOC borrowers may not be prepared for the coming change in their payments — and some even may not be aware that they’re facing significant payment increases once their loans start to amortize. As an example, a borrower who has a 10-year $50,000 HELOC balance with a 4 percent interest rate and a 20-year amortization term could see a monthly payment increase from $167 to $303. Of course, these payments are in addition to that borrower’s monthly mortgage payment.”