Starting about 10 years ago, it was not unusual to obtain a home loan with a 10% down payment from the borrower, an 80% first mortgage, and then a home equity line of credit (HELOC) as a 10% second mortgage.
For some borrowers who have not refinanced in the meantime, and have been paying interest only on that HELOC loan, their time is coming due. Credit lines usually have mandatory "resets" after 10 years when borrowers must now pay up or pay an amortized principal and interest payment. For some people, who may have been paying an interest only payment of $200-$250 on a $100,000 loan, their monthly payments will probably increase significantly: they will now be paying principal and interest, along with interest rates now being set at a higher level. It was not unusual for lines of credit to be as high as $150,000. A jump up to another $500-$600 in monthly payment may not be unexpected in these cases.
The bank that owns the note, if the borrower does not or cannot pay the new payment, can demand full payment and foreclose if there is enough equity in the property. Borrowers, depending on the bank, may be able to refinance or modify these loans.
However, with new mortgage rules coming into play in January 2014, refinance may not be possible because the homeowner may not qualify, interest rates will be higher, their credit scores may not make the grade, or the combined loan amount on the mortgages may exceed the value of the house.
Owners should prepare themselves now by checking for the reset date in their loan documents, the amount of increase, their ability to refinance, and also finding out if they have equity in their property. Should the borrower consider foreclosure (because after all, it's only the second), that's really not advisable: in California if the line of credit was made as part of your purchase loan, then you may be exempt from a deficiency judgment, but you would still have a foreclosure on your record, which could cause problems for years every time you applied for insurance, a job, or anything else where your credit is checked. Even if you could avoid paying, and the bank did not spend money foreclosing because you still don't have equity in your property, your credit score would suffer with each non-payment. Late pays/delinquencies have huge impact on your credit score, and again, it would be something to impact you for years into the future.
Borrowers should review their loan documents, and contact their banks to find out what a reset increase amount would be, and then what their other options might be.
Note: About $30 billion in home equity lines dating to 2004 are due for resets next year, $53 billion the following year and a staggering $111 billion in 2018.
In order to find out the value of your home, please contact me. Equity in your property could be your friend in this situation. For an easy online request, click on Long Beach Real Estate Homes and Condos for Sale here.
