The HELOCS have been re-set!  They are due, and they are bringing a reckoning with them!  Words such as these sound like dialogue from the latest summer blockbuster sci-fi movie, but actually, they echo the economic news of June 1 and 2, 2014.

We began the month of June with some serious news about HELOCS, and before we report it, we believe we should give borrowers a clear definition of a HELOC.  We assure you it is not some flying cinema alien or an unusual species of summer migrating seagull!  Unfortunately, it is not as entertaining, either. Some borrowers might find their HELOC has transformed into something quite harrowing.

1. The HELOC is A line of credit acquired by a homeowner who uses his home as collateral for this type of loan. The name is an acronym: Home Equity Line Of Credit

2. With a HELOC, a homeowner is permitted to draw on the line of credit, once a maximum loan balance is created by the lender.

3. You know there is a price! The price for this service is interest, of course. The interest is charged on a predetermined variable rate. Usually the lender bases this amount on major prime rates.

4. According to Investopedia, “Once there is a balance owing on the loan, the homeowner can choose the repayment schedule as long as minimum interest payments are made monthly.”

5. The term of a HELOC can continue from under 5 years to over than 20 years. Then the homeowner must “pay the piper,” because all balances must be paid in full.  This type of loan is highly marketed by local banks. Boats have been bought. Kitchens have been remodeled. Children have been sent to college.  Vacations have been taken. So, on the surface, HELOCS have increased retail.

Borrowers were encouraged to take out these loans because of “rising home values, which increase the amount of equity available to homeowners.”

HELOCS looked even more alluring when interest rates ran low and inflation was at a reasonable level. Another attractive feature of this kind of financing is that mortgage interest is often tax-deductible. Alternative borrowing strategies do not hold that advantage.  You are invited to click and read more about this type of loan at this reliable source.

So, What Put HELOCS In The News?

Now that you are acquainted with HELOCS and their rules, we will explain all the excitement at CNN and the Wall Street Journal. For 817,000 borrowers, payments are going to jump.

Basically, this is because their HELOCS required them to pay only on the interest for the first ten years. Now, beyond that ten-year mark, they will need to pay on the principle as well as the interest.

Add this to the fact, that interest has gone up, and some borrowers will be facing a big difference in their monthly budget. Many such borrowers can not afford to pay off the HELOC and refinance their home.

Do the Math

One example would be if Mr. X took out a $70,000 dollar HELOC in 2004. To pay out this line of credit on his home, he has been happily paying $270.00 per month for the last ten years. Now, having crossed the ten year mark, he will have to pay $560.00 per month, and Mr. X’s payments could go higher over the next few years, if interest goes higher.

About 23 billion dollars will be paid in such modification this year, by homeowners with HELOCS.

Some economists are worried about what effect this kind of dramatic budget adjustment will have on homeowners who are the heart and soul of increasing retail business in the United States.

Jon Hilsenrath at the Wall Street Journal believes this will take a shark-sized bite out of the national retail spending average. He stated, “$23 billion in HELOCS is more than double last year’s level, according to estimates by Equifax, the credit-reporting firm, and the Office of the Comptroller of the Currency. An average of about $50 billion in loans will reset in each of the next three years.”

What’s The Moral of the Story?

At Palm State Mortgage, we caution our clients to carefully understand their mortgage situations. Financially, ten years can go by very quickly, and debts, emergencies, job security and the national economy can have serious effects on the family finances. When considering a Home Equity loan, there is a reason to understand every single piece of paper required to make that loan.

A HELOC can not be considered free money; a reckoning will come. In fact, every type of loan has a “reckoning,” in the end.  That does not mean they are bad; it just means you need to seriously understand your paperwork. Understanding your present finances and planning for the future are the Palm State Mortgage Company guide-lines for every borrower.

Thank you for reading our blog today, and we hope you do not forget that Father’s Day is coming up next week.