Home equity loans aren’t risk-free yet

Many HELOC are due to expire.

While the housing market has improved considerably over the last half-decade, the recession is still fresh on the minds of lenders, and with good reason: The issues caused by overstretching during that boom and subsequent bust are still lingering in some areas. 

One particular area in which this is true is home equity lines of credit (HELOC). These loans allowed homeowners to receive capital based on the value of their homes, which during the best years were generally far higher than the remaining payments. After a decade, however, HELOC revert from their initial low interest rates to higher ones, while the borrowers are no longer permitted to draw credit from them. This combination causes issues for both borrowers and lenders.

A CNBC story discussed the ramifications of this process, citing a report by RealtyTrac, which analyzed open HELOC's originating between 2005 and 2008.

"Fifty-six percent of the 3.3 million Home Equity Lines of Credit potentially resetting with higher, fully amortizing monthly payments from 2015 to 2018 are on properties that are seriously underwater, meaning the combined loan to value ratio of all outstanding loans secured by the property is 125 percent or higher. States with the most HELOC resets are California, Florida, Illinois, Texas and New Jersey – states where foreclosure rates were and still are above the national average," according to the study.

This naturally causes some stress on lenders who are scrambling to figure out exactly how much they are owed, and on which schedule. There is, however, a solution. An amortization schedule for loans can help ensure that home loan lenders accurately track all incoming payments.