How to cope with HELOC payment shock
If you're among the millions of Americans bracing for the minimum payment on their home equity lines of credit to go up — maybe way up — there's no need to panic.
There are several solutions to your problem.
Most HELOCs require low, interest-only minimum payments for the first 10 years.
But in the 11th year, the line of credit is closed, and you must begin repaying the amount you borrowed (or in lender-speak, the principal) over the next 15 to 20 years.
Because homeowners opened so many HELOCs during the real estate bubble of 2004 to 2008, about 3.3 million HELOCs are shifting into the repayment phase between 2015 and 2018, according to estimates by real estate data firm RealtyTrac.
Experian, one of the three major credit-reporting agencies, estimates the typical payment on those loans will rise by nearly 70%.
If you're among those facing a bumped-up HELOC payment, here are six potential solutions:
Solution 1. Suck it up and pay the money.
If your monthly budget can handle the increased payment, go ahead and make it. You have to repay this debt at some point.
Even if it requires a long, hard look at your household budget to find the extra cash, it's well worth the effort, says Eric Selk, executive director of HOPE NOW, a Washington, D.C., nonprofit that's helped arrange mortgage workouts for more than 7 million homeowners.
"Putting repayment off indefinitely is just going to create more financial tension in the long run," he says.
A Department of Housing and Urban Development-approved home ownership counselor can help you make the hard choices required to start retiring this debt now.
Solution 2. Call your lender and ask to refinance.
Your monthly HELOC bill will list a phone number for your lender. Call and ask if you can refinance into a new 10-year interest-only HELOC.
Whether you're allowed to re-up for another 10 years may depend on whether the loan has been sold to an investor. If an investor holds your debt, the mortgage servicer must follow that investor's guidelines on extending your HELOC for another 10 years.
Solution 3. Shop for a new HELOC.
If your credit and income are solid, and your home is worth more than you owe on your primary mortgage and current HELOC, you could pursue a new line of credit from another lender. (Compare the best home equity rates from dozens of lenders in our database.)
Once you're approved, you can use money from the new home equity loan to pay off your existing HELOC.
Just be aware that underwriting guidelines are more conservative now than they were 10 years ago, says Terry Francisco, senior vice president for Bank of America Home Loans in Charlotte, North Carolina.
While lenders used to allow primary mortgage and home equity debt to reach as high as 100% of a home's value, Francisco says his bank limits total lending to 85% of a home's value today.
The average FICO credit score for its HELOC borrowers is about 750, he adds.
Solution 4. Get a new first mortgage.
If you have enough home equity, do a cash-out refinancing of your first mortgage, and use the extra cash to pay off your HELOC.
Let's say, for example, that you were paying 3.5% on a $100,000 first mortgage and 5.5% on $50,000 borrowed through a line of credit.
Your total monthly payments would be $678 while you were just covering the interest on the HELOC and $857 once you had to start repaying the principal.
If you rolled all $150,000 of the debt into a new 30-year fixed-rate mortgage at 4.1% — the current average cost of those loans — the new payment would be $725 a month, or more than $130 less than before that mortgage debt was consolidated.
The only drawback is that the total interest costs will be more if you take the full 30 years to repay this debt.
Solution 5. Call your lender and ask for help.
If you just can't afford the higher payment, tell your lender and ask if it has programs to help you out.
Bank of America, for instance, has a HELOC modification program that may offer payment assistance to help customers who can't afford the higher HELOC payment, Francisco says.
If your lender won't help, call the Homeowner's HOPE Hotline at 888-995-HOPE. Its credit counselors have special tools to help you sort out your options.
Never, ever respond to an unsolicited email, call or letter offering a HELOC workout. As more HELOC problems arise in the years ahead, scammers will follow the money. They'll promise to erase your debt, then take your money and disappear.
Solution 6. Look into federal programs.
A few of the federal programs for troubled homeowners might be good options, especially if:
- You're in financial trouble because you lost your job or have high medical bills.
- You're one of the 56% of HELOC borrowers who owe more on their combined mortgages than their homes are worth.
"Because these loans are on your lender's books, they'll be more motivated to keep that loan performing in some way, even if you are underwater," said Daren Blomquist, vice president at RealtyTrac. "That could involve extending the period that's interest-only, giving you more time to regain equity in your home as home prices continue to go up."
To use the federal government's Home Affordable Refinance Program (HARP), you typically have to have a home equity loan secured by Fannie Mae or Freddie Mac, the two big government-owned companies that buy mortgages.
That's a problem because most HELOCs are not Fannie or Freddie loans, Blomquist said.
But there's a back-door way to use the program. If your first mortgage is guaranteed by Fannie or Freddie, and you can qualify for the federal Home Affordable Mortgage Program to modify that mortgage, you'll also get access to the Second Lien Modification Program.
You might even get some of what you owe on your HELOC forgiven in the process.
Owe more on your first mortgage plus your HELOC than your home is worth? You may be able to use the Federal Housing Administration's Short Refinance Program to get a new FHA loan that repays your existing first loan and HELOC and also potentially reduces the total amount you owe.
The Home Affordable Refinance Program is another option if you owe more on your mortgages than your home is worth.
Each of these federal programs has detailed rules about various aspects of your loan, including the size of your loan, which company guaranteed your loan and what year you took out your loan. The HOPE NOW counselors can walk you through those rules and identify the programs for which you're qualified.