A large number of U.S. homeowners will be affected by a Home Equity Line of Credit (HELOC) reset over the next few years, and many borrowers of all ages are either unprepared or grossly unaware of the financial repercussions that await them, a recent study indicates.
Of more than 800 polled homeowners holding HELOCs, 43% will be affected by a reset in the coming years, according to the TD Bank HELOC Reset Measure released this week. And as HELOC borrowers reach their end of draw periods, 23% of survey respondents said they do not have financial plans in place to handle a reset.
Feeding into this unpreparedness were misconceptions borrowers hold regarding HELOC repayment. Only 19% of respondents to the TD Bank survey understand that a HELOC reset will increase their monthly payments, while 34% said they believe their monthly payment will be reduced when their HELOC resets.
Additionally, TD Bank found that one third of borrowers who opened HELOCs prior to 2011 are unaware of their draw period expiration date described in the HELOC contract—a number that rises among Baby Boomers to 42%.
Meanwhile, 53% of respondents who opened HELOCs between 2005 and 2008 don’t know the impact the reset will have on their monthly payments.
Many HELOCs allow borrowers to draw for 10 years and make interest-only payments, said Mike Kinane, senior vice president in TD Bank’s Home Equity division.
“When this draw period ends, borrowers are required to pay principal and interest, which may increase their monthly payments,” Kinane said in a press release. “It’s important that HELOC borrowers plan ahead and review their contract to determine the best course of action based on their current and future financial situations.”
However, the vast majority of respondents (60%) who do not have a plan for their HELOC resets indicated that they will not seek guidance from their lenders.
“If borrowers do not have a financial plan for the end of their draw period they should contact their lender as early as possible,” Kinane said. “A responsive lender will offer multiple ways for you to pay down your line of credit.”
But for borrowers who are prepared to face HELOC resets, more than one-quarter of respondents said they plan to refinance their HELOC into another loan, and almost 70% of those borrowers plan to approach their current lenders.
For those borrowers considering a refi, using a HELOC for emergency funds was most important to them (35%), followed by home renovation (27%) and travel (26%).
With home values soaring during the housing boom, homeowners sought HELOCs as a means for tapping into their home equity to finance a variety of expenses such as paying for home renovations, medical bills, and even to help with debt consolidation.
In the TD Bank survey, the top three reasons homeowners opened a HELOC were to renovate a home (38%), consolidate debt (24%) and purchase a new vehicle (20%).
“HELOCs can be a smart and flexible way for consumers to make home renovations, consolidate debt, pay for education, or deal with unexpected expenses,” Kinane said. “It’s a wise idea to consult with your banker, and take advantage of the benefits that HELOCs can offer.”
Written by Jason Oliva