Consumers facing good, bad surprises
Millions of consumers are in for a big surprise in the coming months.
For some, the surprise will be good news; for others, not so good. Perhaps even devastating. And they don't appear to be prepared.
Let's start with the latter group, which consists of homeowners who have home equity lines of credit and are about to get the shock of their lives.
Over the next few years, some 3 million homeowners with HELOCs have to say goodbye to making minimum, interest-only payments on their lines of credit, according to the RealtyTrac, a unit of Attom Data Solutions. Some loans allowed owners to stick to those minimum payments for up to 10 years. But soon the piper will come calling, and they'll be required to start paying down their principal as well as paying interest on their remaining balances.
According to a poll of 800 homeowners with HELOCs by TD Bank, 4 out of 5 do not realize they are going to get a financial kick in the pants in the form of an increase in their monthly payments.
More shocking stats: One-third of borrowers who opened HELOCs prior to 2011 are unaware of when their loans roll over from interest-only payments to interest-and-principal payments, even thought the date is right there in their loan papers. And more than half who took out a line of credit between 2005 and 2008 don't know what the impact will be when their HELOC “d-day” comes around.
But here, perhaps, is the topper: Among those who do know a reset is coming, 1 out of 3 actually think their payments will go down, not up. Good luck with that!
Fortunately, there's still time to stave off a disaster. Dig out your loan papers, look for the rollover date and start working on how to handle the pending increase in your payments.
“It's important that HELOC borrowers plan ahead and review their contracts to determine the best course of action based on their current and future financial situations,” says Mike Kinane, a senior vice president with TD Bank.
If you are unsure of what to do, or if it looks as though you might be buried under higher HELOC payments, contact your lender right away, Kinane says. “A responsible lender will offer multiple ways for you to pay down your line of credit,” he says.
According to the survey, more than a quarter of the respondents plan to refinance into another loan, perhaps another HELOC. But there are other options, including rolling the unpaid balance into your first mortgage.
There's nothing wrong with HELOCs. They are a good and flexible way to pay for home improvements, to consolidate debt, to pay for Jimmy and Jenna's educations or deal with unexpected expenses. But you have to know when the inevitable is coming and get ready for it.
Now, on to the good news. It involves former homeowners who went through tough times when the housing market crashed in 2008. They lost their homes through short sales, foreclosures or bankruptcies.
That black mark remains in their credit records for seven years. But between now and June, the pock will fall away for some 2.5 million people.
Given what these folks went through, there's no telling whether they will ever test the housing waters again. But if they do decide to take the plunge, the latest analysis from Experian, one of the three major credit bureaus, shows that two-thirds of them are scoring in the near-prime or higher credit segments.
In other words, should these folk decide to become “boomerang buyers,” the chances are good that they'll find it much easier to qualify for financing.
“The trends that we're seeing are promising for both the mortgage seeker and the lender,” says Michele Raneri, Experian's VP of analytics and business development. “While many of these borrowers have gone through a very difficult time, it is encouraging to see them taking control of their finances with better credit scores and all-around better credit management.”
In some quarters, “boomerangers” are expected to be an important segment of the housing market in the years ahead. But some will never, ever own a home again, and a small minority never should have become owners in the first place.
Some, though, have already re-enlisted, and, according to the Experian study, most are showing responsible credit behaviors, have improved their credit scores and are current on their debts.