Trouble Ahead For HELOC BorrowersHELOC convenience and flexibility is enhanced by the fact that lenders require only interest payments during the first five or 10 years. This, of course, makes a HELOC exceptionally affordable. But, eventually, the principal that you borrow must be paid back, and the payments will go up. This is about to happen to many homeowners who tapped into their home equity, because it was an easy way to get cash during the first few years of this century. But it may trigger a major financial crisis. Although the housing market is gaining traction, many experts anticipate a severe wave of HELOC troubles within the next few years. This has the potential to trigger a calamity for both lenders and borrowers. Plus, its happening at a time when the economy is hoping that the housing market will provide healthy, optimistic performance.
The Perfect StormHELOCs are divided into two parts. The first is the draw period, and lasts five to 10 years. During this stage, the borrower can withdraw money from the line of credit, and is only required to make interest payments. After the draw period expires, however, the loan goes into the payback phase, where the borrower can no longer take out money. This can last for 10 to 20 years, during which time, the borrower must make payments of both interest and principal. A new report from the Office of the Comptroller of the Currency explains that nearly 60 percent of all HELOC borrowers will have to start making these higher payments within the next two to five years. To make matters worse, if prevailing rates rise as expected, borrowers with a variable rate HELOC will see theirinterest rates go upjust as theyre also forced to pay down their principal.
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