Home Equity Lines of Credit Are Ballooning
Home Equity Lines of Credit may cause a new problem for banks as many reach their 10 year anniversary. This means many borrowers willl have to start paying their principal balance on these loans on top of the interest payments they’ve been paying for the last 10 years.
According to an article published by Reuters, more than $221 billlions worth of these loans will hit the 10 year mark for the next four years in the country’s largest banks such as Bank of America and Citigroup. Most of these loans have about 40% of the line of credit still outstanding.
The biggest problem? Borrowers who took out their home equity line of credit during the housing boom (and subsequent bust) will find themselves unable to complete payments when their payments almost triple and their floating interest rates continue to raise.
This is the main concern that is always in the back of mind whenever a potential client tells me they’ve rather take out a home equity line of credit instead of taking out a reverse mortgage.
Making monthly payments is fine and dandy when you’re working and only paying interest but what about when the payments increase and you find yourself out of a job during retirement?
A home equity line of credit is a potential option for many, especially if they need a rainy day fund during retirement, but it is still a loan you have to make payments on, even if it’s only interest (and that’s just the beginning).
A reverse mortgage is a loan as well but it is one you don’t have to pay back until you pass away or move out of your primary residence. It’s a loan that allows you to reap the rewards of your home equity when you need it the most or save it for the future, when things may not be gong as smoothly as planned.
According to Equifax, a consumer credit agency, borrowers who miss payments during the 10th year of their loan, usually doubles in the next year because the payments become too much to keep up with, especially on a fixed income. When borrowers default on their loans, banks lose out because profits from selling the home may only be enough to cover the remaining mortgage balance, not the home equity line of credit and the mortgage.
While banks still may have plenty of ways to make money, if they find themselves loosing more than they’re gaining, future borrowers may find getting a home equity line of credit, or a loan of any kind, a lot more difficult. For some, this may mean putting their dreams of homeownership on hold.
Before you make the decision, think about it…can you pay your home equity line of credit?
Be aware that while you cannot lose your home under normal circumstances, foreclosure may occur if you do not pay your taxes and insurance and otherwise comply with the loan terms.
Interested in a reverse mortgage or simply want more information? Give PS Financial Services a call at (888) 845-6630 or via email at info@PSReverseMortgage.com. We do not pressure those who inquire. We are simply here to help.