The resurgence of HELOCs
A sale pending sign is posted in front of a home for sale on May 27, 2014 in San Francisco, California.
Home equity lines of credit, or HELOCs, were all the rage in the early 2000s. People borrowed against their homes to fund all types of things: New cars, college educations, even second homes.
Now, HELOCs are making a slow return to the market after all but disappearing during the recession.
The resurgence is slow because, as financial journalist Ilyce Glink says, "The idea of a home equity line of credit is, get this, you have home equity. You don't have home equity, which is a problem for most Americans, unless you were very lucky and bought in 2009-2012.”
For those who were able to secure a HELOC back in the day, Glink says that they may find themselves in a precarious and surprising financial situation as the bill comes due for these loans. “Many of the home equity lines of credit that were set up back in the early [2000s] were interest-only for the first ten years. And then they have a little clause in them that says either you pay them off or whatever the balance is converts to a 15-year rate loan,” Glink says.
Glink says that this means that millions of people who were only paying interest on their loans will essentially be hit with a 15-year mortgage that now includes billions of dollars in principal. Some homeowners could see their payments triple.
Refinancing is a great option for people who find themselves in this situation, but Glick says that many people wouldn’t qualify for a refi in the current market.
“Ten million people are still functionally underwater with their mortgages. That means if they tried to [refinance] today, they wouldn’t have enough equity in the house or they literally have zero or negative equity, and there’s no way for a regular lender to refinance them.”
For a few years, at least, Glink suspects that there will be a number of people who will not be able foot the bill and this could have a larger affect on the economy.
“From now through 2017 when the big bulk of these HELOCs start to convert and come due, we’re going to see an increased amount of people who can’t pay them. So there’s going to be increasing defaults and maybe an increase in the level of foreclosures due to HELOCs…,” Glink says.
Ilyce Glink is a financial journalist and the founder of ThinkGlink.com