Home equity lines of credit (HELOC) and home equity loans are instruments commonly used by homeowners to borrow money. As you know, the home equity loan is much like a traditional loan (specific amount, specific interest rate, specific repayment play, specific term) and HELOC, based on the equity in the home, is non-traditional (amount tied to home equity, flexible interest rate, flexible repayment rate, flexible term).
Let’s focus on the term of the loan. Most HELOCs, many of whom initiated their HELOC during the peak of the market in 2007, have terms set between 2-10 years and are then be “reset.” In other words, most HELOCS are due to reset in 2017. Many borrowers view a HELOC reset as a “double whammy”…double whammy because most borrowers will be required to pay both the interest on what they have borrowed (now more due to increased interest rates) plus the principle on the loan. Prior to the reset, HELOC borrowers were only required to pay the interest on the amount they had borrowed through this instrument.
What to do as an on top of it real estate agent? Help an overwhelmed HELOC borrower who’s feeling the double whammy of a HELOC reset to understand the options available to them.
Here are the three options of dealing with resetting HELOC loans. One, the borrower can simply pay off the HELOC. This option is a good one for borrowers who haven’t borrowed very much on their instrument and/or have paid back most of what they’ve already borrowed.
Two, the borrower can refinance the existing HELOC with a second one. This option works for borrowers who haven’t the funds to pay off the first HELOC and who have continued need for a flexible repayment instrument that HELOC borrowing provides. The obvious downside here is having multiple loan instruments for which the borrower is responsible both in terms of repayment plans and accounting. Two HELOCS can be a real stretch for some borrowers both financially and psychologically.
The third option is to negotiate with the lender to consolidate the HELOC and the regular mortgage into one instrument. The obvious upside is having one loan instrument rather than two in terms of record keeping and accountability. Additional considerations may be having one fixed interest rate instead of the flexible rate associated with the initial HELOC and having one “regular” or fixed monthly payment that covers both the interest and the principal whereas the HELOC repayment covered just the interest. This option is the most “fixed”…one payment, the same payment, at one time every month through the term of the loan…and the most consistent.
You as the agent are in a position to go to bat for your HELOC borrowing client by explaining all options, helping the client determine which option might be best suited to their needs, role playing the negotiations with their lender and continuing to build trust with your client. Client relationships never end; your agent services shouldn’t either.