Be ready for the home equity loan 'reset'

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.

For borrowers like 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.

Just how significant a problem this will be is a subject of debate. Housing prices have rebounded over the last several years and the jobless rate has fallen, putting many consumers on better financial footing. For those reasons, Greg McBride, senior analyst with Bankrate, said he did not see widespread economic risk from the coming resets. Still, he said, "that's little consolation to those who see their payments increase and don't have the money to handle it."

Marietta Rodriguez, vice president for national home ownership programs at NeighborWorks America, a nonprofit, says problems with the resets have not emerged as a significant issue yet, although that could change over the next two years as draw periods end for more loans.

Here are some questions about home equity lines of credit:

How will I know when my line of credit is due to reset?

Many banks, with urging from federal regulators, are notifying borrowers a year or more in advance of their reset period, to fend off potential surprises. Bank of America, for instance, is notifying customers 24 months ahead of the "end of draw" phase, so borrowers can plan ahead. If you haven't received a notice and are unsure of the reset date, you can contact your lender and ask.

Catch up on top stories before rush hour

Become a Times subscriber to get our afternoon newsletter, The Rundown

We’ll break down Tampa Bay’s biggest environment, politics, business, education and culture news every weekday.

Loading...

You’re all signed up!

Want more of our free, weekly newsletters in your inbox? Let’s get started.

Explore all your options

Can I do anything ahead of time to prepare for the reset period?

Douglas Robinson, a spokesman for NeighborWorks, suggests making sure your credit profile is in good shape, so that if you do need to refinance you will be in the best position possible to secure a new loan at a competitive rate. If you need help understanding the terms of your loan, talking to a housing counselor may help. You can search by ZIP code for counselors approved by the federal Housing and Urban Development Department.

What if I am worried about making the higher payment?

You should contact your lender to ask about options, like extending the loan repayment period. You will ultimately pay more interest with an extended term, but your monthly payments will be more manageable. Home equity lines are often held by the original lender, rather than sold to investors, which means the bank may have more flexibility to adjust the terms of the loan, Blomquist said.