Resets on home equity lines of credit threaten thousands of borrowers

It’s the looming foreclosure crisis that doesn’t have to happen.

And we’re here to help you avoid it.

A wave of resets on home equity lines of credit is set to wash over the Las Vegas Valley in coming years. For thousands of borrowers, it could be the crest that sinks them financially.

“The Las Vegas metro area was hard-hit by the housing crisis and while rebounding home prices have helped many, the homeowners who are still underwater continue to be at high risk for default,” said Daren Blomquist, vice president of RealtyTrac, an Irvine, Calif., research firm that tracks mortgages and foreclosures. “Adding in the payment shock of a resetting (home equity line of credit) could push them over the edge. For many strapped homeowners, it could be the last straw, so we will be watching to see if there is a ripple effect in the housing market.”

Borrowers can avoid getting sucked under, though.

Before we talk strategies to stay afloat, consider the rising line-of-credit tide.

Nevada is home to 46,047 home equity lines of credit — total dollar volume $2.2 billion — set to adjust from 2015 through 2018, according to RealtyTrac. Nearly 39,000 of them, or $1.8 billion worth, have substantial negative equity, with homeowners owing more than their house is worth.

Nevada ranked No. 1 in March for its share of home equity lines of credit borrowed against substantially underwater homes.

Locally, 35,182 lines of credit — 31,168 of them seriously underwater — will see new terms in the next three years.

The peak adjustment year will be 2016, when 11,621 local lines will see higher payback terms, RealtyTrac said.

Lines of credit come in three basic forms, all of which adjust after 10 years and bring the potential for “payment shock” — at least a doubling in the monthly bill, said Kelly Kockos, senior vice president of home equity for Wells Fargo.

First is the interest-only line, which switches at the term’s end to a payment combining principal and interest. Second, a balloon loan is a line of credit the homeowner must pay back in full at the end of the 10-year term. Finally, there’s the line that converts to a regular loan once the term is up.

Regardless of the specific type, many borrowers have no clue the conversion is coming, observers said.

“Even if they understood everything fully at the beginning of 2006, when their home equity line of credit closed, they may not remember 10 years later what the terms were,” said Casey Moseman, a loan officer at All Western Mortgage in Las Vegas. “People who have their bills set on autopilot are going to be surprised.”

Less than half of line-of-credit borrowers understand that their payment will change after 10 years, said Brian Maier, broker and owner of Raintree Mortgage Services in Las Vegas.

So the most important order of business is to know your terms. When, exactly, does your line adjust, and by how much?

Some banks are proactive. Wells Fargo, for example, is reaching out to every line borrower two to four years before adjustment and discussing refinancing or repayment options. But you don’t need to wait until your bank calls you. Reach out first. Your lender can tell you how much more you’ll owe and when.

The average monthly payment increase will be $148 statewide and $135 in Las Vegas, RealtyTrac’s analysis said.

Once you know your specific payment, do some basic budgeting to see what you can afford.

If you can swing your soon-to-be-higher payment today, start making it now, Moseman said. You’ll get in the habit of paying the adjusted rate. Plus, you’ll be paying down your principal ahead of schedule.

If you can’t afford the payments now — or even when the line adjusts — your options depend on whether you have equity.

If you’re underwater, start with a request for a line of credit modification, Maier suggested.

“It’s hit or miss, but it’s certainly worth asking. I’ve seen some banks start the 10-year interest-only period all over again,” he said.

The lender may also refinance the line at a lower interest rate.

Wells Fargo rolls some borrowers into a new 10-year term that covers principal and interest from the start to “remove the drama that happens down the road” after a decade of interest-only payments, Kockos said.

But about half of the bank’s line of credit customers go straight into a conversion from a line to a regular loan with monthly payments.

Wells Fargo also has a home preservation program for borrowers in serious mortgage distress.

If you have equity, mortgage brokers recommend blending your primary mortgage and line of credit into one, new primary loan. (This isn’t an option unless your home appraises for more than the combined loans’ value.) Depending on when you took out your initial loans, your interest rate could be the same or lower: Borrowing rates were in the high 6 percent range in 2006, Maier noted. Today, they run as low as the high 3 percent range.

If you decide to combine loans, remember that you’ve been paying your mortgage down for at least a decade. That means you have 20 years or less left on your original note’s term. A new 30-year mortgage starts you over on that payoff process.

If you can swing it financially, consider a loan that will at least match the progress you’ve made on your first mortgage. If you’ve paid off eight years, for example, some loans let you lock in a 22-year term on your new note, Maier said. If you’re nearing the halfway mark, refinancing into a 15-year loan may make sense. A 15-year loan could also mean lower interest rates — maybe even in the high 2 percent range.

So although you’re adding up two loans, your payment won’t necessarily be higher, Kockos said.

Still, whether it’s the right approach depends on a lot of factors.

If you’re younger and need to limit your monthly house payment, reupping to a 30-year loan might be the better approach, Maier said.

If you’re nearing retirement and you don’t want a house payment well into your golden years, a shorter-term loan makes more sense, Moseman said.

“Look at your total cost on your new payment, and compare it to the two current payments,” she said. “Does the payment go up, or down? Then you have to decide for yourself what works. How old are you? What’s your income? What’s your income-to-debt ratio? Do you save money? Do you live paycheck to paycheck now?”

Don’t forget in your calculation to account for closing costs, which will be about 5 percent on $100,000 loan and 2.5 percent to 3 percent on $300,000 loan.

Regardless of the life preserver you decide to grab, think now about that rescue.

“People should call their current lender if they’re in any stage of needing to discuss options,” Kockos said. “Take control of your financial situation, and take action.”

Contact Jennifer Robison at jrobison@reviewjournal.com. Find her on Twitter: @J_Robison1