Many Home Equity Loans are Facing a Reset Point

A decade ago, when home values were soaring, many homeowners financed all sorts of spending using home equity lines of credit, often borrowed in addition to a mortgage.

Many of these credit lines have a 10-year draw period, during which borrowers may use the money as needed and make interest-only payments. After the draw period, the loans typically become regular installment loans, with terms of 10 to 20 years — meaning the principal must be repaid as well.

As a result, many borrowers face what could be a significant increase in monthly payments this year or during the next several years.

Maria Giordano, a onetime trauma nurse who is now a full-time real estate investor in Phoenix, says she expects the $400 monthly payment on the equity line of credit on her suburban home to nearly double after the loan resets in 2017. She took out the loan in 2007, she says, to pay for renovations and a new patio. She was reluctant to sell the house after the real estate downturn, but has decided to put it on the market now and pay off the debt, since property values have rebounded enough to create significant equity.

For borrowers like Ms. Giordano who have equity in their homes, the looming reset is less threatening than it might be. If they don’t want to sell, but have good credit, they can try to refinance the loan at current interest rates, which are now quite low, either as a new line of credit or as part of an overall refinancing package that replaces their first mortgage and home equity line with a single home loan.

But Daren Blomquist, vice president of RealtyTrac, which compiles housing data, says not everyone will be so fortunate. RealtyTrac recently estimated that about 3.3 million home equity credit lines totaling $158 billion and originating between 2005 and 2008 were still open and were scheduled to reset between 2015 and 2018. For those loans, the average increase in monthly payments was estimated to range from $138 for loans resetting in 2016 to $161 for those in 2018. More than half — about 1.8 million loans — were on homes that were seriously underwater, meaning the borrower owed more in total debt than the home is worth.

For underwater borrowers, refinancing may be difficult — especially if they have less-than-stellar credit.

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