In a survey encompassing more than 800 homeowners who presently hold a Home Equity Line of Credit (HELOC), TD Bank found that many of them are generally clueless about how their line of credit works.
For starters, they don’t know their HELOC reset date… or even what a “reset date” is, for that matter. Nearly one-third of borrowers who have opened HELOCs admit they are unaware of their draw period expiration date, and this number rises among women and Baby Boomers (42%).
More than half (53%) of respondents who have opened HELOCs confess they don’t have any idea how the reset will impact their monthly payments. More than one-third of respondents (34%) erroneously believe their monthly payment will be reduced when their HELOC resets. Only 19% of respondents understand that a HELOC reset will most likely increase their monthly payments.
During the housing boom, many homeowners borrowed HELOCs to finance expenses such as home renovations, medical bills and college tuition. But that was years ago.
“Many HELOCs allow borrowers to draw for ten years making interest-only payments,” explains Mike Kinane, SVP/Home Equity at TD Bank. “But when this draw period ends, borrowers are required to pay principal and interest, which may increase their monthly payments.”
According to TD, Three-in-ten homeowners have received a home equity line of credit since 2014, including nearly 40% of Millennial homeowners. And by 2018, TD says 43% of all U.S. homeowners will be affected by a HELOC reset.
Many appear unprepared, according to TD’s survey results. 23% of respondents said they do not have any financial plans in place to handle the end of their draw period. A majority of respondents (60%) who do not have a plan for their HELOC resets indicated that they won’t bother seeking guidance from their lenders.
More than one quarter of respondents said they plan to refinance their HELOC into another loan, and 69% of those borrowers say they intend to approach their current lenders.
40% of those with no plan would like guidance and advice on how to handle HELOC expiration from current lender.
This creates marketing communications opportunities for retail financial institutions. Banks and credit unions should not only proactively reach out to all their current HELOC customers with a pending reset, they should also consider targeting anyone in their market(s) who hold HELOCs with any lender.
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Why Consumers Get HELOCs In the First Place
In their study, TD also asked people why they wanted a HELOC. The top three reasons respondents opened a HELOC were to renovate a home (38%), consolidate debt (24%) and purchase a new vehicle (20%).
On average, Millennials report a broader range of reasons to get HELOCs than their older counterparts (Gen Next and Baby Boomers), including travel/vacations, home renovations and emergency funds.
For those respondents considering refinancing, using their HELOC for emergency funds is most important (35%), followed by home renovation (27%) and travel (26%).
A majority of respondents (64%) took out a HELOC for more than $50,000.