Do you know what happens to the terms of a home equity line of credit (HELOC) once it reaches the maturity date? Most people don't.
Unless a home equity loan is fully amortized it probably has a maturity date. On the maturity date the loan terms will change. Some HELOC's require a balloon payment at maturity, others convert to fully amortized 5 or 10 or 15 year fixed or variable rate loans.
The contract terms are not likely to be competitive at maturity. Fully amortized fixed or variable rate conversions may not be affordable. If the borrower and/or the property cannot qualify for refinance balloon payments may force foreclosure or sale of the home.
If you have a HELOC and do not know the terms of the loan, do not wait - call your lender and review the terms so you can make a plan.
HELOC and Reverse Mortgage
Wells Fargo was the lender. The first mortgage had been paid in full, early. The HELOC, roughly 15% of the value of the property, was secured for the purchase of an SBA commercial loan 10 years earlier. The homeowner had impeccable credit. Wells Fargo acknowledged his excellent qualifications throughout their 40 year business relationship.
When the homeowner was forced into retirement with a heart condition, his income dropped but was stable. He was never late or delinquent making a HELOC payment.
Wells Fargo sent the homeowner a demand for full payment at the maturity date of the HELOC. The borrower was in the process of trying to sell his business and did not have the cash to make the balloon payment . However he did continue to send Wells Fargo regular monthly payments, which they accepted and credited to his account. However, Wells Fargo would not extend the loan or offer any option for refinance. Instead they assessed late payments and threaten foreclosure if the balloon payment was not made.
The borrower went to another lending source and they approved a loan to pay off the HELOC. After all documents were signed and the loan was ready to fund, the new lender updated the borrowers credit report, Wells Fargo had reported the balloon payment in default, and the new lender cancelled the loan. Prior to this event the borrower had never had a late or delinquent payment in his life.
This was the first time I recommended a reverse mortgage. For the sake of paying off a $75,000 loan, the borrower was forced to pay more than $8,000 in fees and expenses for a reverse mortgage. And, he will continue to incur interest and mortgage loan insurance expenses until the loan is paid off.
Be a good friend, talk to your friends who may have a home equity line of credit (HELOC). Encourage everyone to investigate the terms of their loans before they face the surprise of balloon or high interest loan payments.