Moon Doggie, Get Your Board ‘cause the Home Equity Amortization Wave is Coming

Amortization sounds like a nerdy, financial term. It’s really a simple way to describe the process of paying off of debt in regular installments over a period of time according to Investopedia. Home equity lines of credit are debt. So, how and when are they paid off, other than when a home sells? Unfortunately that’s a question to which too many homeowners have given too little consideration. Most homeowners understand that their equity lines have an adjustable interest rate, typically tied to the prime rate plus or minus a specific percentage. Less obvious is that they also have a 15/30 year term with a five or ten year draw period. In other words, with a 15-year loan you may have a line of credit for five or ten years, then have to pay off the total amount over a fixed term, such as ten years.

What does that mean to you if you have a home equity line? Well, the term is the length of time that you are being loaned the money, secured against your home. The draw period is the length of time during which you have access to the money the bank will loan you AND the period of time that the loan will be interest-only. After the draw period you need to pay interest and some, if not all, of the principal back. (These conditions are specified in your home equity line agreement.)

If you have a 30-year term loan with a ten year draw period that means you have 20 years to pay off the loan. How much will that total amount be? Well, if you have a $60,000 line of credit, and your interest rate is 7.5% your monthly payment would go from $375.00 to $483.36. Maybe interest rates won’t be so high, and maybe you owe more. Maybe interest rates are only 5% and you owe $100,000. Your payment would go from $416.67 to $659.96.

Let’s say that you owe $150,000, and you have to pay the loan back over ten years, and the interest rate is 5%. Your payment would go from $625 to $1,590.98. This increase might put the squeeze on the most conscientious budget minded homeowner.

What’s the “wave” that I mentioned? Most equity lines were written in 2004 and 2005. In California, between 2004 and 2005, 1.43 million home equity loans were written at an average limit of $150,000 in 2004 and $139,000 in 2005. Currently there are $649 billion in home equity lines across the nation.

What are your options? Maybe you want to lock in a fixed interest rate now. If you owe more than your home is worth, you may be able to be able to negotiate with your lender much like you would for a loan modification. If not, and you have enough equity, you may be able to refinance both the principal and equity line into a single new first mortgage. According to Adam Wise of Wells Fargo Home Mortgage, you may need as little as a 15% equity position in the home to get a single mortgage with no mortgage insurance.

Uncertain about the value of your home, you might want to consider talking to a local real estate agent like Tom Benoit of Caldwell Banker Real Estate. Not only does he agree, he’s also willing to help, “Given the situation of the uncertainty in our local market, I think it would be prudent for homeowners to know where they stand in respect of the value of their home. I would be happy to give them a free market analysis.”

REMEMBER, mortgages are front end loaded with interest payments – you pay much more interest in the early years than the later years. So if you have had your loan for ten years and you refinance, you start over with a higher percentage of your payment again going to interest vs. principal. That may cause you to pay a whole lot more interest for a long period of time. How much more? Well, you may want to consult with a financial planner to evaluate the impact of any mortgage refinancing. I know a very good independent hourly financial planner…..