By Molly Hensley-Clancy
NEW YORK, Dec. 20 If you are one of the millions
of Americans who took out a home equity line of credit (HELOC)
in the midst of the housing bubble, there is a good chance you
need to start paying it back soon -- and at a higher interest
In pre-crisis years, banks aggressively marketed HELOCs to
consumers, allowing homeowners to obtain them with little income
verification and limited appraisals. They promised easy cash for
banks and borrowers alike, requiring feasible interest-only
payments that are often tax-deductible.
But after 10 years, most HELOCs enter a repayment period,
during which borrowers can no longer take money out of their
credit line and must pay down the principal.
As reported by Reuters, more than $221 billion of these
loans at the largest banks will hit their 10-year anniversary
during the next four years. That amounts to about 40 percent of
outstanding home equity lines of credit.
David Kershner took out a HELOC in 2006 to cover home
improvements -- mainly to install central air conditioning in
his suburban Philadelphia home -- and to pay down debt.
Kershner recently discovered that the interest rate on the
$30,000 HELOC, currently 4.68 percent, will reset in January
2017. "I'm not happy that I didn't know about this," says
Kershner, who works at a family-run environmental technology
Monthly payments for consumers like him could double or even
Here are five things to consider if you have a HELOC.
FIGURE OUT THE FINANCES
After the typical 10-year date, a borrower with a $30,000
HELOC at an interest rate of 3.25 percent would have to make
payments of $293.16, according to analysts from Fitch Ratings.
The first step for consumers with HELOCs is to understand
their loan's terms, says Robert Mecca, a financial adviser.
Most loans have a 10-year open period during which borrowers
pay only interest, followed by a 10-year repayment period. Some
offer 15-year repayment periods, and some rare lines of credit
must be paid back in full immediately.
But people often don't realize the repayment period is
coming up, says Mecca. "Some are even surprised that there's a
final maturity date at all."
PAY DOWN PRINCIPAL
The Federal Reserve has indicated that its benchmark
interest rate could begin to rise as early as 2015, something
that will filter through the banking system. As a result,
borrowers' payments could go up even more drastically.
"If you're looking to ease the pain of adjustment, chipping
away at the balance is the best way to do it. It's more
productive now, at the time of low interest rates, because more
of each dollar goes towards the principal," says Greg McBride,
an analyst at Bankrate.com.
Experts warn, however, not to go too far. Given fluctuating
home prices, dumping large chunks of your liquidity into your
home is ill-advised.
"I wouldn't suggest emptying your 401(k) to pay down your
line of credit, no matter how high the balance," says Keith
Gumbinger, vice president at mortgage-advice site HSH.com. "A
lot of folks have learned the hard way in 2008 that having
equity in your home isn't the same thing as having cash
Peter Grabel, a loan originator with Luxury Mortgage in New
York, advises some clients to lower their payments by combining
a HELOC with a first mortgage. "You don't have to worry about
the rate changing, and you can pay back over 30 years if you
want to," Grabel says. "The downside is you're adding a lot more
time to your mortgage."
Grabel worked with a couple who wondered what to do with a
$200,000 HELOC set to hit its 10-year anniversary in 2015. The
line's outstanding balance was low, just around $10,000. The
couple had 22 years and $300,000 left on a $370,000 mortgage
-and they also wanted to buy their daughter, who had just
graduated from college, a condo.
Rather than directly using their credit line, which had a
variable rate, Grabel helped the couple roll the credit line
into a new $535,000 mortgage. They bought the condo with cash,
also managing to pay off $20,000 in credit card debt and
significantly lowering their pre-crisis mortgage rate to 4.25
PAY DOWN DEBT
Gumbinger suggests borrowers consider putting their last few
years of an equity line of credit to good use - borrowing and
repaying it like a credit card.
"Just remember that the more money you put on that line of
credit, the more pain you have coming up," McBride notes.
Borrowers with outstanding credit card debt should consider
using their home equity lines of credit to consolidate, since
interest rates on credit cards are far higher.
If you're considering selling your house, it could be worth
your while to borrow money for improvement projects, like
kitchen and bathroom upgrades, that will increase your home's
If your borrowing needs exceed your loan's 10-year
anniversary date, you can look into securing a new line of
credit -- but be aware that things have changed since the
crisis. Banks now require much more thorough documentation of
income and assets, and homes are subject to a full appraisal.
Borrowers who have seen their home values -- and thus their
equity -- shrink substantially post-crash may no longer qualify.
"Conditions were probably a lot easier the first time you
walked in the door," Gumbinger says.