A growing number of U.S. borrowers have missed payments on home equity lines of credit (HELOC), even as mortgage delinquencies have been declining.
As many borrowers are beginning to hit their loans’ 10-year anniversary, they will have to start paying the principal balance as well as the interest at this time. Therefore, homeowners will see an increase in their monthly payments.
HELOCs were the loan of choice during the housing boom, due to their flexibility, allowing homeowners to receive a line of credit while using their house as collateral. During the draw period, typically 10 years, borrowers were only required to pay the interest.
Fifty percent of current HELOCs were initiated between 2004 and 2006, which means that most of the loans will be amortizing in 2014, according to Lender Processing Services (LPS). Between 2013 and 2017, approximately $221 billion in loans at large banks will hit their 10-year anniversary. Today, 40% of HELOCs are still outstanding.
The reluctance to pay HELOC loans signifies the trouble in the near future. For many, credit scores will decline substantially as the loans hit their 10-year anniversary. For the average U.S. borrower, payments are expected to triple. This is alarming for subprime borrowers who took out equity loans and will endure increasing interest rates by the Federal Reserve due to floating interest rates.
According to Equifax, the number of borrowers missing payments around the 10th anniversary can double by the 11th year. When this occurs, banks can lose up to 90 cents on the dollar, as HELOCs are usually the second mortgage on the property. In the event of a foreclosure, the majority of the sales proceeds will go to the primary mortgage.