Home
equity lines of credit often require low payments in the initial years as home
owners only pay the interest on these loans at the onset. But later on, these
loans reset with higher payments when home owners have to start paying down the
principal.
About
44 percent of home owners with home equity lines of credit through Wells Fargo
have paid only the minimum amount due on these loans, reports The New York
Times.
Many
borrowers may soon see their home equity lines of credit reset with higher
payments and those higher payments may be too much for some borrowers.
The
Office of the Comptroller of the Currency recently warned of the danger these
resetting payments could pose for many home owners across the country. The OCC
warned that nearly 60 percent of all home equity line balances would require
payments of both principal and interest between 2014 and 2017.
The
report highlights three main threats home equity borrowers face: Rising payments
as they begin to pay back the principal and not just the interest on these
loans; the risk of rising interest rates (many of these loans have adjustable
rates); and refinancing challenges “because collateral values have declined
significantly since these loans originated.”
Many
of the home owners have seen their property values decrease since they first
took out the home equity loans.
“These
are among the riskiest loans in any bank’s portfolio,” The New York Times
reports. “As borrowers are pressed to pay principal and interest, write-offs are
almost certain to rise.”
Source: “Here Comes the Catch in Home Equity Loans,”
The New York Times (July 14, 2012)