Mortgage rates have now been on an upward trend for over a year, and this trend is expected to continue, which could create some trouble for those homeowners with Home Equity Lines of Credit (HELOC).
The HELOC has been a very popular product as it gives people access to the equity in their home when they want it through a revolving line of credit. The challenge is many homeowners with HELOC’s only pay the required interest portion on a monthly basis and nothing towards the principle as happens with a conventional mortgage. This keeps payments low, but also means you will never pay off the HELOC, and as rates move up, so does your payment, making it harder and harder to keep pace, forget getting ahead.
So what seemed like a great product for the last 2 decades of decreasing mortgage rates, may cause some issues going forward. Some things to consider:
- switch any portion of the HELOC that is likely to continue to be debt for more than 6 months over to a fixed repayment mortgage with principle and interest components to your payment
- set up auto payments to your HELOC that are greater than the interest being charged so that you are reducing the balance owing every month
- for those who are lucky enough to get money back every spring when they file their taxes, or receive bonuses from work, put that money against the principle
The other issue with HELOC’s that many people are not aware of, is they are loans that can be recalled at any time when the banks feel they have too much exposure to debt. So act before the bank does and make sure you have options and are using the HELOC for what it was intended for, which is short-term loans to get you through fluctuations in income or expense, not a long-term debt solution.
If you or someone you know wants to discuss mortgage options,
call Daryl French at 250-470-8843.