Homeowners have firm plans on how they will use their home equity loans, but few have read the fine print on repayment terms, according to a recent survey of borrowers.
A survey by Toronto-based TD Bank found 43% of U.S. borrowers would be subject to resets on their home equity lines of credit (HELOC) within two years which would end their ability to borrow more, and start requiring higher minimum payments. However, 27% of respondents had no idea when their loans reset, and 38% falsely believed that a reset would lower their payments.
“Many HELOCs allow borrowers to draw for ten years making interest-only payments,” said Mike Kinane, SVP/Home Equity at TD Bank. “But when this draw period ends, borrowers are required to pay principal and interest, which may increase their monthly payments.”
The knowledge gap provides an opportunity for lenders to reach out to borrowers to help them avoid unpleasant surprises.
“If borrowers do not have a financial plan for the end of their draw period they should contact their lender as early as possible,” says Kinane. “A responsive lender will offer multiple ways for you to pay down your line of credit.”
Credit unions held $79.3 billion in HELOCs and second mortgages in August, accounting for about 9% of their total loans, according to CUNA Mutual Group's latest Credit Union Trends Report.
The TD Bank survey released last month was based on the responses of 812 borrowers from Aug. 29 to Sept. 6, and weighted by age, gender, and region to reflect the HELOC population. It has a 3.6% margin of error.
The survey also showed:
- About one-third of borrowers have credit limits of less than $50,000, one-third $50,000 to $99,000 and one-third $100,000 or more.
- 29% of borrowers opened their HELOCs during or before 2008 — most in the prime years of the housing bubble before values crashed with the Great Recession.
- Renovating a home was the most common reason for opening a HELOC. It was cited by 36% of men and 41% of women.
- One of the biggest gender differences in the use of a HELOC was buying a new car: a plan for 25% of men but only 11% of women.
- Buying a car was also a use that declined with age. It was cited by 28% ages 18 to 34, 17% ages 35 to 54 and 13% ages 55 and older.
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