Ten years seems like a long time, doesn’t it? Ten years ago, George W. Bush was in the White House, “Harry Potter and the Goblet of Fire” was in theaters, and the housing market was in a big overheated lather. Thanks to their housing wealth, Americans splurged on gas-guzzling SUVs, vacations and home theaters, tapping the cash in their homes as if they were dry-walled ATMs.
The bubble subsequently burst, as you may recall, especially since we’re all still paying the price for lax government regulation, corrupt bond rating agencies, and reckless Wall Street geniuses who were too smart for our good.
Ten years — and many, many foreclosures and bankruptcies later — the housing market still is trying to eke its way back to normal, hundreds of thousands of workers remain underemployed or quit looking for jobs years ago, and anyone who does have a job makes less now.
And one other thing: The bank just called. Your home equity line is due.
Your payment could double
There are a ton of home equity lines of credit, or HELOC, for short, coming due from the E-Z credit days of the housing boom. For the first 10 years of a HELOC’s life, the borrower pays just the interest and can draw down on the line of credit, although many HELOCs were frozen when home values crashed after 2007.
After the 10 years is up, however, the HELOC converts to a fully amortized loan with regular monthly payments, typically for a 10-year or 20-year term. At current rates, the monthly payment can double.
The real estate analyst RealtyTrac estimates that nearly 3.3 million HELOCs with a balance of $158 billion will start resetting between this year and 2018. More than half of those loans are on properties RealtyTrac says are still underwater, with the borrower owing more on the home than its current market value.
Here in Metro Detroit, more than 133,000 lines that originated between 2006 and 2008 will start resetting next year.
The best way to deal with a resetting loan is to refinance the balance into a new mortgage, which will ensure a low, steady interest rate for the length of the loan. You can keep your mortgage payoff on schedule by either prepaying on a new 15-year or 30-year mortgage (since you’ll free up the cash you were paying on the HELOC), or even shorten the term, since rates still are near historic lows.
Even though rates are ticking up, the average 15-year mortgage rate is 3.11 percent — barely above the historic average rate of inflation. But they won’t get any lower, so even if your HELOC doesn’t reset for another year or two, lock in the low rate now. You also can refinance into a new HELOC or a home equity loan, at a fixed rate for a fixed term.
What if you’re underwater?
If your home won’t appraise, your options are more limited. Call the lender and find out what the new, amortized payment will be, and ask for options. That’s likely to be a better rate than a personal loan or credit card advance, and you don’t want to be pulling money out of a retirement account and taking a 30 percent minimum tax hit.
Even a low-interest loan from a 401(k) isn’t a good idea now that the stock market is continuing to rise. Still, shop around. Some credit unions offer personal loans as low as 4.99 percent, but others are as high as 15.5 percent.
You can find listings at Bankrate.com and other websites, and you’d be surprised how many credit unions you may be eligible to join. If you, a parent, grandparent, child, sibling or grandchild is associated with the armed forces in some way, you can join Navy Federal Credit Union, for example, where personal loans are 9.99 percent.
Another option if you have ample cash is a CD loan or a credit union share loan. Rates are very low because these loans are secured by cash in a certificate of deposit or a share account held by the lending institution. If you have an investment account, you can borrow against that at decent rates, but not if it’s an Individual Retirement Account. However, if you’re already putting Junior or Missy through college, you can pay their tuition and other qualified expenses from your IRA tax-free, and use the cash that would go toward college bills to pay the HELOC, though this does diminish your retirement nest egg.
If you will be borrowing or refinancing, check your credit and get your score in the best shape possible now, even if your HELOC reset is a year or more in the future. If you can’t get creative, you can always buckle down for some household budget cutting, and pay off the HELOC as soon as possible.
Chances are that 10 years ago you thought you’d be able to easily retire a HELOC over the next decade but, just like the Spanish Inquisition, nobody expected the worst financial collapse since the Great Depression to be right around the corner. The good news is that however you handle your HELOC now, paying it off means you really will be in better shape come 2025.
Brian O’Connor is author of the award-winning book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”