Foreclosures With Home Equity Credit Lines Too

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More people in America are missing payments on their home equity loans than at any time in this decade, Moody’s Investors Service said on Dec 13th, showing how the U.S. housing crisis has spread to many loans that were once generally considered safe.Moody’s U.S. Home Equity Index Composite showed that the number of loans at least 60 days past due or that have entered the foreclosure process was 16.53% in September 2007. That’s more than double the 7.93% rate one year ago, and more than triple the 4.99 percent level in June 2005. A recent comparison was 15.23% in August 2007.Moody’s announced their results the same day RealtyTrac Inc., a real estate data firm, said U.S. home foreclosures in October soared 94 percent from a year earlier to 224,451 units, although the total was 8 percent below the 243,947 foreclosures mark set in August.To gain a better understanding of what is happening with so many people, let us look at what a home equity line of credit is. It is a financing instrument used by homeowners who want to borrow against the equity in their home. There are several different types of home equity lines of credit. These differences are frequently based on the interest rate charged the homeowner.Sometimes a home equity line of credit will have variable interest rates and usually this is the part that most homeowners did not understand or anticipate. With variable interest rates the normal rate can vary between 4.25% to 17.0%. With this variance, the homeowner cannot know for sure from month to month what the interest payment will be. The interest rate on the loan can vary based on a certain index.In some cases the home equity line of credit offers a low introductory “teaser” interest rate. Lenders and loan officers alike offer the product with ads that read like this: Borrow $100,000.00 on your home and pay $395.83 per month with an interest rate of 4.75%. These rates sound attractive, but they generally do not emphasize the fact that the homeowner will later be responsible for a considerably higher rate. That start rate could actually be between 6% – 11% above the prime rate in any given month, given the borrower’s index. Most homeowners never read the loan materials carefully, so they never understood exactly what the payments could be and now their family’s home could be in jeopardy.Another concern has been the costs of the application process. Some offers of a home equity line of credit come with a large one-time fee, many times $1000 to $3,500. So just by obtaining the loan, besides the interest charges, that deficit has to be repaid.If the differences in the various types of home equity lines of credit confuse the homeowner, then it may be better to consider alternatives to the home equity line of credit. Other options include: a fixed rate second mortgage or a credit line that does not use a person’s home for collateral.Misunderstandings, compounded with a tougher real estate market has left many in foreclosure and now they are forced to find a new place to live.