Some underwater Florida homeowners may face a new financial challenge within the next four years when their home equity lines of credit (HELOCs) reset from introductory low interest rates.
Palm Coast, FL – March 6, 2015 – Some underwater Florida homeowners may face a new financial challenge within the next four years when their home equity lines of credit (HELOCs) reset from introductory low interest rates. When the interest rate on a HELOC resets, it can create a new, and sometimes unexpected, financial burden for homeowners.
Florida ranks second behind California in total number of HELOC homeowners with 513,229, according to RealtyTrac's first-ever U.S. HELOC Resetting Report. Seriously underwater homes backed 71 percent of those Florida HELOCs that will reset to a higher interest rate over the next four years.
While the danger of resetting HELOCs has been discussed for some time, however, positive economic conditions may offset some of the damage.
"Low rates, rising prices and an improving economy have taken the steam out of the HELOC reset pressure cooker," says Mike Pappas, CEO and president of the Keyes Company, covering the South Florida market.
"In 2014, 1 percent of our South Florida housing stock saw their HELOCs begin to amortize and (they) paid – on average – a $162 per month increase in their monthly payments," Pappas says. "Over the next four years, 7 percent of our property owners will see a similar increase and, as long as interest rates stay low and we continue to experience rising prices, there should be no major impact on the market."
For the report, RealtyTrac analyzed open HELOCs originated between 2005 and 2008 with the assumption that these loans will reset with fully amortizing monthly payments after a 10-year period of interest-only payments.
Nationwide, 3,262,036 HELOCs with an estimated total balance of $158 billion originated during the housing price bubble are still open and scheduled to reset between 2015 and 2018. Of these, 1,834,588 (56 percent) are on residential properties that are seriously underwater, meaning the combined loan to value ratio of all outstanding loans secured by the property is 125 percent or higher.
"Homes purchased or refinanced near the peak of the housing bubble between 2005 and 2008 are much more likely to still be underwater despite the strong recovery in home prices over the last three years," says Daren Blomquist, vice president at RealtyTrac. "Furthermore, many homeowners with HELOCs who have positive equity likely already refinanced to mitigate the payment shock from a resetting HELOC – an option not readily available for homeowners still underwater.
"While these underwater homeowners experiencing payment shock from resetting HELOCs are at higher risk for default, the good news is that we've already seen a large wave of more than 700,000 resetting HELOCs in 2014 without a corresponding wave of defaults," Blomquist adds. "The bad news is that a much lower 40 percent of those 2014 HELOC resets were on seriously underwater homes. We are entering a period of higher risk over the next four years when it comes to resetting bubble-era HELOCs – especially given slowing home price appreciation that offers underwater homeowners less hope of recovering their equity in the short term."
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