Over the next few years (2015 to 2018), a larger number of U.S. homeowners (43 percent) will be affected by a Home Equity Lines of Credit (HELOC) reset, and many appear unprepared, according to a new study released by TD Bank, America's Most Convenient Bank (No. 39 on the DiversityInc Top 50 Companies list). The HELOC Reset Measure polled more than 800 homeowners who hold HELOCs, and also revealed that 23 percent of respondents do not have financial plans in place to handle the end of their draw periods.
During the housing boom, many homeowners borrowed HELOCs to finance expenses such as home renovations, medical bills and college tuition. With home values soaring, homeowners found HELOCs to be a convenient way to borrow or consolidate debt.
"Many HELOCs allow borrowers to draw for 10 years and make interest- only payments," said Mike Kinane, Senior Vice President, Home Equity, TD Bank. "When this draw period ends, borrowers are required to pay principal and interest, which may increase their monthly payments. It's important that HELOC borrowers plan ahead and review their contract to determine the best course of action based on their current and future financial situations."
Repayment Misconceptions Exist Among HELOC Borrowers
Many HELOC borrowers are unaware of their HELOC reset date described in their contract, despite communications from lenders.
- Only 19 percent of respondents understand that a HELOC reset will increase their monthly payments.
- More than one-third (34 percent) of respondents believe their monthly payment will be reduced when their HELOC resets.
- A majority of respondents (60 percent) who do not have a plan for their HELOC resets, indicated that they won't seek guidance from their lenders.
"If borrowers do not have a financial plan for the end of their draw period they should contact their lender as early as possible," says Kinane. "A responsive lender will offer multiple ways for you to pay down your line of credit."
Why Borrowers Sought HELOC Loans over the last decade
- The top three reasons respondents opened a HELOC were to renovate a home (38 percent), consolidate debt (24 percent) and purchase a new vehicle (20 percent).
- A majority of respondents (64 percent) took out a HELOC loan for more than $50,000.
- One-third of borrowers who opened HELOCs prior to 2011 are unaware of their draw period expiration date described in the HELOC contract; this number rises among Baby Boomers (42 percent).
- More than half (53 percent) of respondents who opened HELOCs between 2005 and 2008 don't know the impact the reset will have on their monthly payments.
Prepared Borrowers Plan to Refinance and Find New Uses for HELOCs
- More than one quarter of respondents plan to refinance their HELOC into another loan, and almost 70 percent of those borrowers plan to approach their current lenders.
- For those respondents considering a refinance, using a HELOC for emergency funds was most important (35 percent), followed by home renovation (27 percent) and travel (26 percent).
- On average, Millennials report a broader range of reasons to get HELOCs than their older counterparts (Gen Next and Baby Boomers), including travel/vacations, home renovations and emergency funds.
"HELOCs can be a smart and flexible way for consumers to make home renovations, consolidate debt, pay for education, or deal with unexpected expenses," said Kinane. "It's a wise idea to consult with your banker, and take advantage of the benefits that HELOCs can offer. TD is invested in making the entire borrowing process a positive experience; it's a part of what makes us the human bank."
This survey polled a nationally representative sample of homeowners who currently have HELOCs. The online fieldwork was conducted between Aug. 29 and Sept. 5, 2016. In total, 812 completed surveys were included in the results. Data has been weighted by age, gender, and region to reflect the HELOC population. Margin of Error is +/-3.6 percent.