Federal Deposit
Insurance Corporation

Winter 2013/2014

Do You Owe on a Home Equity Line? Prepare for Rising Payments

Audio (MP3 4.1 MB)

A home equity line of credit (HELOC) provides a way to borrow up to an approved credit limit using your house as collateral. When mortgage interest rates recently were at all-time lows, millions of homeowners signed up for HELOCs. But since then, interest rates have been going up, and many experts have predicted that they will continue to rise.

"It's a good idea to pay attention to rising interest rates and think about whether you would be able to handle all your household expenses if your monthly HELOC payments increase or you reach the end of your draw period and have to pay off the total outstanding balance by making a large 'balloon' payment," cautioned Glenn Gimble, a Senior Policy Analyst at the FDIC. "Remember, you will damage your credit score and you could even lose your home if you do not repay your home equity line of credit as agreed."

First, it is important to understand how your loan payments are calculated and how to determine whether your payments in the future may increase, perhaps significantly, especially if you have a HELOC with a variable interest rate. Your HELOC also could allow you to pay only the interest on the money you "draw" (borrow) from the credit line in the early years, after which your monthly payment amount will increase (to start paying off the money borrowed), even if the interest rate remains the same.

If you believe that making future HELOC payments will be a strain, work to find a solution as soon as possible—ideally, well before you miss any payments. Discuss your concerns with your lender, and do not hesitate to explore your options with other lenders. These are some possibilities to consider:

• Pay off your HELOC by borrowing a set dollar amount using a second mortgage (another type of home equity product) with a fixed interest rate;

• Pay off both your HELOC and your current first (main) mortgage by refinancing them into a new mortgage loan at a fixed interest rate; or

• Contact your lender to request a repayment plan at a lower interest rate. This would likely involve the lender suspending your ability to borrow additional money. The lender also might continue to charge fees, such as an annual fee, that you have agreed to pay

"Check with a financial advisor to determine which option may be best, particularly if you decide to refinance your first mortgage," said Sandra Barker, an FDIC Senior Policy Analyst.

For additional tips from the Federal Reserve Board and the Consumer Financial Protection Bureau, visit http://files.consumerfinance.gov/f/201401_cfpb_booklet_heloc.pdf.