The Refinance Boom is not Over? Refinance Your HELOC!

January 23rd, 2014

boom comic book image

Actually, the refinance boom is indeed over. However, there are a fair amount of people that still need to refinance. There are a stunning amount of home equity lines (HELOCs) outstanding and most people will need to refinance those. Most HELOCs were set up so that the first ten years of the loan only require interest only payments and no principal is due. Then, in year 11, the principal would start to amortize. And it amortizes over 20 years, not 30. This is a problem because payments amortized over 20 years will be a lot higher than when amortized over 30 years, and with interest rates seemingly rising, that will add to the pain because most HELOCs are adjustable rate mortgages.

Data to consider

In an article in the Wall Street Journal on December 27, 2013 titled “A Home Loan That Could Bite” there is some scary data cited:

“From 2004 to 2008, borrowers gorged on billions of dollars’ worth of home-equity lines of credit…”

“The balance must be paid off over 20 years after the interest only phase for the first 10 years, and that repayment period will soon begin for many borrowers. Between 2014 and 2018, $208 billion worth of HELOCs will start coming due, compared with a total of only $20 billion for 2012 and 2013…”

“Defaults on HELOCs jump when the repayment period begins, data from banks show. The problem could get worse if interest rates rise, because the loans generally have adjustable rates…”

“Most consumers just put their head in the sand…”

Refinance now to avoid a surprise in your HELOC

I fear that many consumers will delay refinancing their HELOC until after the rates rise and the HELOC starts to amortize. They have been comfortable for many years making interest only payments, at very low rates. However, they should look at refinancing now to avoid a rude surprise that’s coming up soon with rates rising and an amortization period coming due.

In order to refinance a HELOC a consumer will need to consider the following:

  1. If you want to refinance a HELOC and wrap it into your current 1st trust, take a careful look at what your current interest rate is on your current 1st trust.
  2. Then factor in a hypothetical set of terms and payments for your current HELOC.
    • E.g. If the HELOC is 3% now and the terms are interest-only payments at $250 a month on a balance of $100,000, you may want to estimate that $100,000 will be paid back at an estimated rate of 5% over a 20-Year amortization, which would be $659 a month! This is over 2.5 times the current hypothetical payment of $250!
    • Then add the $659 estimated HELOC payment to your current 1st trust monthly mortgage payment (not including taxes and insurance).
  3. Check with a mortgage lender and see what interest rate you can refinance both the 1st trust mortgage and the HELOC into on one loan that pays off both mortgages.
  4. Then see how much the new monthly payment is compared to the current 1st trust and the hypothetical HELOC payment.

I think you’ll find that taking the risk off the table on the HELOC makes sense almost every time.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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