2 Reminders HELOC Owners Need To Budget With The Future In Mind

[Jun 22, 2009.]

 

1) Adjustable Loan Balances Can Be Tricky To Manage During Tough Times
One of the preliminary qualifications a home equity lender will require is that a borrower has sufficient equity to fund a home equity loan. Even with a traditional mortgage loan, homeowners must prove to lenders that their home has enough equity to be borrowed from. In the case of HELOCs however, homeowners have continual access to this line of credit. As a result, it is actually possible for homeowners to continue borrowing from their home even if they lack the required equity.

Given the recent price drops in many neighborhoods, home equity loans and HELOCs have been a common culprit for negative home equity. Fortunately, this headache can be easily avoided if borrowers plan their finances ahead of time, and also keep an eye on their home's current equity. While most lenders advertise the easy access of HELOCs, homeowners should take the extra time to consult with an appraiser or home equity loan specialist beforehand. This way, if a specific neighborhood has suffered a significant price drop, homeowners will be aware and prevent any additional borrowing on their home equity loan.

2) Adjustable HELOC Rates And The Downside Of Historic Lows
Since late last year, qualified homeowners have had the fortunate opportunity to snag home equity lines of credit at quite the discount. Starting in January of 2009, the Prime Rate has been comfortably sitting at 3.25% along with the effective .25% Fed Funds Rate.  As a reminder, home equity lenders typically charge their interest rates based on the Prime rate plus a set margin.

But while these low interest rates do translate into cheap home equity loans, homeowners must also realize that the current cost of borrowing is only temporary. Unfortunately, many financial analysts agree that once the economy begins to pick up, the Fed Fund Rate and Prime Rate will quickly follow suit to avoid inflation fears. Essentially, homeowners must approach these home equity loans with the realization that their monthly payments have almost nowhere to go but up.

Additionally, most HELOCs are already structured to introduce monthly payment increases--regardless of interest rate changes and market trends. The reason for this increase is that most HELOCs only require a minimum payment covering interest charges during the first few years. Over time, the homeowner will then be required to make the full principal plus interest payment every month. Between this built-in monthly increase and possible rate changes, homeowners need to plan their finances accordingly. In recent years, one of the most difficult challenges for struggling homeowners is the process of dealing with monthly payment shock. To help plan accordingly, a home equity loan specialist can provide a payment time table, along with possible scenarios detailing the effects of interest rate changes.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.