NEW YORK (MainStreet) — Millions of Americans will soon see monthly bills shoot up on home equity lines of credit (HELOCs) taken out during the housing boom, because HELOCs are going to start making homeowners pay both interest and principal, not just interest. That's bad news because many consumers are already underwater, meaning they owe more than their places are worth, a RealtyTrac study shows.
"A lot of people were using their homes as ATMs during the bubble, and that — coupled with the fact that home values have since gone down — has backed a lot of them into a corner," says Daren Blomquist of RealtyTrac, which recently analyzed home equity lines of credit on millions of properties.
HELOCs are a type of second mortgage that homeowners use to tap into equity that they've built up in their residences.
A bank will typically give you a revolving line of credit up to a certain amount (often around $100,000) and let you use the money to buy whatever you want. You typically have to pay just interest — no principal — on your balance for the first decade of the loan's 30-year term.
But after that, you generally have to begin paying interest and principal — and RealtyTrac thinks that will soon create big problems for millions of homeowners who got HELOCs between 2005 and 2008, just as the housing market peaked.
Home values collapsed in late 2008 as the housing bust and Great Recession took hold, leaving lots of HELOC borrowers "underwater," owing more on their first and second mortgages than their properties are worth even today.