Despite record-low interest rates, monthly mortgage payments may double for more than one million American homeowners. That's because a decade ago they opted for "interest-only" loans or home equity lines of credit. But most of those loans were structured to reset after 10 years -- at which time the loan would require payment of both principal and interest.
That's what's happening now. There is about $23 billion in home equity loans (HELOCs) scheduled to reset this year, and in each of the next three years -- all suddenly requiring the borrowers to pay principal, plus the ongoing interest payments, as the loan converts to a standard 15 =-year mortgage.
On a $100,000 HELOC with a 3.75 percent interest rate, the monthly payment (not including taxes and insurance), would jump by over $400 a monthly -- from a current $300 to $715.
That is enough to truly dent a homeowner's budget for other spending, and to put a crimp in the economy. And it will be disastrous to those who can't afford higher payments.
Of course, the obvious answer is to start considering a refinance to a regular 15-year mortgage right now -- while interest rates remain low. And if that is not affordable, then you might need to stretch the new loan to 20 or even 30 years to make the payments affordable -- adding to your lifetime mortgage burden. If you qualify!
You'll pay a lot more interest over the life of the loan, if you add on more years after having paid interest for the past ten years. But stretching out the loan now will likely be less of a burden than if you let the current mortgage adjust to include principal and interest payments.
For example, in Florida where so many of these interest-only loans were written, a $100,000 loan for 30 years fixed would pay a current interest rate of 4.31 percent, with a monthly payment of $492 per month, according to Bankrate.com. That's still a big jump from the current $300 on the interest-only loan. But it is less than the $715 monthly payment (see above) that would be required if the current loan converts to a standard 15 year loan.
The 30-year loan shown at Bankrate.com requires at least a 10 percent down payment (or 10 percent equity in the home if it is a refinance) and a good credit score. And that's where the real problem comes in. Most people took interest-only loans or lines of credit at the peak values of the market! Even with the market rebound, there might not be enough equity in the home to refinance.
What To Do?
Very few people gave thought to what would happen in ten years when they took out those loans. At the time, the interest-only loans seemed so attractive and affordable. And it looked like real estate values would keep rising, creating the equity needed to refinance down the road. But now that we are at least six years into a stagnant, at best, housing market these interest-only loans are like a time-release bomb -- threatening to devastate homeowners.
Now is the time to face up to your problem -- before the mortgage system is once again swamped with demand for refinancing these loans. If you do have some equity in your home and good credit, and you face this type of reset in the next year or two, contact a lender immediately. The current low rates are a gift that is not likely to last long.
If you don't qualify for a refinance, based on low home equity or being underwater or having a bad credit report, check into the Federal refinancing programs, especially HAMP. There is an excellent article on Bankrate.com, describing your alternatives if you're underwater. But as you will see, HAMP and HARP have not yet faced the issue of preventing defaults when a mortgage resets.
If you can sell your property now for enough money to pay off the mortgage, before the reset occurs and causes you to default on your payments, you will at least have maintained your credit rating. That could allow you to wait and buy a bargain if another wave of foreclosures occurs in the mortgage market as a result of these resets.
I know it's not an attractive option to move your family out of a home that you can now afford based on interest-only payments. But if you get the opportunity to sell and get out from under this type of loan before it resets, you'll be among the few who have flexibility in a buyer's market.
It has taken a long time for the last of these chickens (call them turkeys) to come home to roost from the halcyon days of mortgage lending excesses. But they will have a strong impact on the housing market in the next few years, and on the families that will face this hit on their finances. That's The Savage Truth.