Future Home Equity payments may be a shock

Lender Processing Services, Inc. (LPS) has released its October Mortgage Monitor which shows that 48 percent of outstanding second lien home equity lines of credit (HELOCs) were originated between 2004 and 2006.

Given that the vast majority of HELOCs originated during this time have draw periods of 10 years, they are set to begin amortizing over the next several years. As the payments on these HELOCs become fully amortizing, many borrowers may see monthly payments increase. According to LPS Senior Vice President Herb Blecher, recent increases in new problem loans among the HELOCs originated prior to 2004 (that have already begun amortizing) indicate increased risk of more delinquencies ahead.

"In the aggregate, the market is experiencing lower delinquencies," said Blecher. "However, among the HELOC population that has already begun amortizing, we are actually seeing an increase in new seriously delinquent loans. As of today, only 14 percent of second  lien HELOCs have passed this 10-year mark, leaving a very large segment of the market at risk of payment increases over the coming years.

Nearly half of all of these lines of credit were originated between 2004 and 2006, with the oldest set to begin amortizing next year. If this trend toward post-amortizing delinquencies carries over, we could be looking at significant risk to the home equity market over the coming years.

If you have a Home Equity Line of Credit, review your paperwork and know when your balance will be fully amortized and for what term.  While first mortgage rates are low, it may be worth looking into a refinance to consolidate the first and 2nd lien loans into one loan payment and prevent the shock of the future higher payment.