Whoever said what you don’t know can’t hurt you, was wrong. Take for example the 43% of U.S. homeowners polled by TD Bank, who over the next couple of years will have their Home Equity Lines of Credit (HELOC) reset. More than a quarter of them don’t know when their draw period ends.
People use HELOCs for things like home renovations, medical bills and college tuition. With HELOCs, you borrow — often for 10 years — and make interest-only payments. When that “draw period” ends, you pay principal and interest. Monthly payments can jump significantly.
However, only 19% of those polled understood that a reset would increase their monthly payments and 34% thought they would decrease.
Confusion is costly.
- Understand the terms
What is the current interest rate? When does it reset? When it resets, how is the new interest rate determined? When are principal payments first due? What will the new payment be? Can the HELOC convert to a fixed interest rate? Know the answers to these questions, says David Reiss, a Brooklyn law school professor, specializing in real estate.
- Come up with a game plan
“Don’t wait until the final month of the interest-only period to evaluate the impact the payment has on your budget,” says Chuck Price, vice president of lending at NEFCU in Westbury.
- Contact your lender
Says Mike Kinane, senior vice president, Home Equity at TD Bank in Mt. Laurel, New Jersey, “There are multiple ways to handle the reset process — refinancing, taking out a new HELOC, etc. Find the right one for you.”