HELOC Dirty Little Secrets
Most Home Equity Line of Credit (HELOC) lenders don’t highlight the fact that the HELOC you took out in 2010 is engineered to explode in 2020.
If they did, why, this month, would homeowners opening their 2nd mortgage statement and find a new payment that could choke a horse?
The process is simple. Banks and lenders offer a teaser interest rate that, compared with credit card debt, looks so sexy it can’t be ignored.
Homeowners fall for the temptation and corral as much debt as they can (under the former pretense of “tax deductibility”). The monthly payment to handle all that debt now seems like a “backpack full of stones” has been removed from their shoulders.
But has it?
Interest-Only Payments (especially for a decade) breed complacency. An occasional adjustment of the Prime Rate by the Federal Reserve Bank (https://www.federalreserve.gov/faqs/credit_12846.htm) can startle homeowners out of their trance, but the adjustments are typically minor (1/4 or 1/2 percent) and it’s easy to slip back into financial hibernation. The debt continues, the consumer just treading water on the balance.
But ticking underneath a pile of paperwork is a wind-up alarm clock set to ring at payment 121.
On the 121st payment a document is summonsed up from the pile that “instructs” the payment to be converted to a 10-year mortgage*. This triples the payment … on the spot. $333 to $1,010 for each $100,000 (based on a rate of 4%).
Next we need to look at the adjustable rate structure. If a MANDATORY payment tripling isn’t catastrophic enough, let’s look at the potential on the interest rate. PER YOUR CONTACT you’ll see what maximum interest rate your product carries. If you apply that rate to your existing balance, your have ANOTHER tripling effect.
Compared against a typical Adjustable Rate on 1st Mortgage the interest rate caps on a HELOC look like something out of a Francis Ford Coppola directed movie.
Are there options? Yes, many. We’re here to guide, help, and illuminate a path to financial safety and security. Sometimes the recommendation is FOR a HELOC, or a Reverse Mortgage. But there are so many moving parts that you’d want to speak with us prior to redirecting. As always we have no sales script and apply no pressure to our conversation. You’ll find our style relaxed and informative.
*These are the most common HELOC’s we’ve encountered. There are HELOCS that have 20-year repayment terms and now even some that are “Evergreen” which means they don’t have the self-amortizing feature, which is cool, but at the same time concerning.