Could old HELOCs Cause Another Financial Crisis?

Photo of bills and calculatorYou may never have heard of a HELOC before, but it might end up having a big impact on your life. This unique form of loan might be pulling America into financial meltdown.

What is a HELOC?

HELOC stands for home equity line of credit. It is a loan that lets homeowners borrow money with their home as collateral. It’s kind of like a second mortgage. Since a home is many Americans’ most valuable asset, these loans are typically only used for important expenses like college tuition, but in the bubble years before the crash, lots of people abused them.

Why This Could Mean Serious Trouble

Most HELOCs are arranged so that the borrower only has to pay interest for ten years. After that, the borrower has to start paying the principal. This means that HELOC rates from the bubble period will start going up now.  There are approximately 4.2 million HELOC outstanding from the bubble years. Equifax estimates that there is 500 billion dollars of outstanding debt in the form of these loans.

To make the matter worse, homes were far more valuable before the crisis than they are now. This means that many Americans are going to see a massive increase in the cost of mortgages without any increase in pay or the value of their homes. This could lead to many foreclosures and serious pressure on the American economy. If people panic, that could mean even worse things for the market…

Time to Panic?

The HELOC crisis is sure to have a negative effect on the economy if something isn’t done soon, but the size of these effects is difficult to know. Most experts seem to think it’s very unlikely we will see anything on the level of the subprime mortgage crisis. More likely, the amount of growth this year is going to be reduced. However, it’s always important to know what dangers are ahead to help protect yourself and your finances.

Julian, Crowder & Shuster is a law firm in Lewisville, TX. We practice family law, bankruptcy law and criminal defense.

 



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