According to federal financial regulators, approximately $30 billion in home equity lines dating back to 2004 are about to be reset – thanks to a ten year mandate that means borrowers will have to start paying principal as well as interest on what amounts to second mortgages on their homes.
The credit lines were in large part started before the housing bubble burst, and were based on current equity values. Now, with so many homes “upside down” when it comes to actual value versus amount owed, homeowners are facing adding up to another $500-$600 a month to their already heavy mortgage payments.
If borrowers don’t make the fully amortizing payments to reduce the principal debt, the bank that owns the note can demand full payment and foreclose on the house. Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, calls this a looming “wave of disaster” anticipating that many borrowers will be unable to handle the higher payments – forcing banks to foreclose, refinance the borrower or modify their loans.
However, if the first and second mortgage can be satisfied, there is still hope for homeowners about to be caught in the trap between their original financing and their floating equity loan. As banks like Citigroup increase reserves on billions in home equity loan lines, the time might never be better for homeowners to look into ways to unload property before late and missed payments begin to pile up.
Cutts also reminds people that waiting to act can cause more problems – failure to meet obligations can utterly trash credit scores, causing repercussions for years. Homeowners who are still paying interest only on boom-time credit lines are well advised to start mapping out strategies now, by calling their bank and seeing what options are available to save them from having their monthly home costs increase by enormous margins.
A short sale could still be the answer, especially if the original mortgage and the home equity line of credit are held by the same bank and there is not much equity left in the home. Those who can achieve a short sale could walk away with dignity intact, and avoid the mess of a foreclosure and even bankruptcy.