It is so tempting to think of home equity as money in the bank, especially when it can be turned into money with a Home Equity Line of Credit (HELOC). But as the 2008 financial crisis taught us, home equity can go away. Then a homeowner can be stuck with the debt.
Reasons People get a HELOC
There are a lot of reasons people get a HELOC. Sometimes there are other options.
To pay college tuition so their child doesn’t have student loan debts. There are options, such as having the student work part-time or take out a few loans. There are also work-study programs, or he or she could get a job at the college and go to school there at night for free. Certainly this author took all night dorm deskworker jobs on the weekends, and worked in work-study programs. It can help your grades and mature the student. With more on the schedule, planning for tests and studying was mandatory. The experience was a good thing, and worth considering for your child.
Too often, these decisions are emotion-based, more than analysis-based.
In another example, a parent wanted to infuse her daughter’s failing restaurant with cash to save it. The same can happen with houses about to be foreclosed. In both cases, a parent is trying to bail out a child. The sentiment is understandable, but really they are only postponing the inevitable, at a very high cost to their retirement or ability to support themselves.
The general rule is: do not loan money to children unless you can afford to never see it again.
How a HELOC Can Hurt You
But home equity loans can be a ticking time-bomb.The terms of a HELOC can change, like what is about to happen to LasVegas. Many homeowners are underwater on the mortgage, which means that the mortgage is higher than the value of the home. “Adding in the payment shock of a resetting (home equity line of credit) could push them over the edge. For many strapped homeowners, it could be the last straw, so we will be watching to see if there is a ripple effect in the housing market,” said Daren Blomquist, vice president of RealtyTrac, an Irvine, Calif., research firm that tracks mortgages and foreclosures.After ten years, the terms of a HELOC changes, and many homeowners are not prepared for it.
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. For underwater borrowers, refinancing may be difficult — especially if they have less-than-stellar credit.
There are two types of HELOC resets: Variable interest rates can reset, and an interest-only repayment plan can reset to amortize. That means payments will switch to include principal and interest.
Many are in for a shock. If you’ve been making interest-only payments for 10 years, “the switch to amortizing over the compressed 20-year period [remaining on a 30-year loan] can lead to an increase of 100 percent or more,” says Peter Grabel of Luxury Mortgage Corp. in Stamford, Connecticut.
If you need help with HELOC, foreclosure or foreclosure mediation, phone Christine Axsmith at Axsmith Law LLC at (202) 285-5415.