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Home equity line of credit warning: Fees can be reset after 10 years

Houses Fron Air IMG_1191Do you have a home equity line of credit or HELOC?

On Monday, I received an email from Bankrate.com with information that HELOCs taken out during the housing boom can surprise borrowers with sharply higher payments when they’re reset.

With HELOCs, the first 10 years – known as the draw period – gives the borrower access to a line of credit where they can borrow and repay as needed. Only a minimum payment of only interest is required.

But at the end of the 10-year draw period, consumers can’t take money out of the line of credit anymore and the outstanding balance then converts to the repayment term, where both principal and interest payments are made, usually over a 20-year period.

Bankrate.com offers this example:

A $30,000 balance at a current rate of 3.25 percent – the current prime rate – carries a minimum payment of $81.25. But, when that same $30,000 balance recasts to a 20-year repayment schedule, the monthly payment more than doubles to $170.16.

Bankrate.com’s Chief Financial Analyst Greg McBride said this conversion from interest-only payments to principal and interest payments could pose problems for unsuspecting or ill-prepared borrowers, especially at a time when household budgets are still tight and income gains have been hard to come by.

Some consumers have used HELOCs to buy cars, furniture, and luxury items or to pay for their kids’ college education.

Be sure to call your bank or credit union to see if your HELOC could be converted to higher payments.

McBride said financial institutions are required to inform consumers that their HELCO is about to be reset. However, they may not understand that the notice means and ignore it or they could miss it in the mail.

Consumers can “get in front” of the higher payments by paying down their balance before the HELCO is converted, McBride said. Another option is to take out a new HELOC to refinance the old one. The new loan will be interest-only during its draw period.

See the Federal Reserve Board’s “What You Should Know About Home Equity Lines of Credit” for more information.

Copyright 2015, Rita R. Robison, Consumer Specialist

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