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HELOC Draw Period EndingWe have talked about the benefits and potential dangers of a home equity line of credit (HELOC) on this website in the past. While this line of credit makes sense for extensive home repairs or maintenance, it does have its drawbacks. One of them is the end of the ”draw period.”

The Draw Period

With a HELOC, you use your home as collateral for the line of credit. Once the HELOC is approved, a borrower can use the line of credit in what is called the ”draw period.” Essentially, this is the amount of time you have to draw funds from the HELOC. The draw period can last up to ten years and during that period, the borrower can make interest-only payments. Low payments for a line of credit sounds great, doesn’t it. At the end of the draw period, borrowers must make full payments, addressing the principal and interest.

Dangers at the End of the Draw Period

As your draw period ends, you must be prepared for the higher payment that it will usher in. If you have been making payments in excess of your minimum interest-only payments, you will be fine. If not, you need to start preparing now. Some borrowers face a higher payment and changed financial circumstances at the same time. The combination could lead to the very real possibility of losing their home. To avoid payment shock and an increased number of foreclosures, banks are being urged to check on the financial stability of some borrowers.

Your lender may have your home as collateral, but it does not want the home. Lenders want to make their money the easy way, by taking your on-time payments. Lenders are getting a little nervous because many of these loans were made just before the recession of 2008-2012, when lending standards were not as strict as they should have been. In total, lenders have $199 billion in draw periods ending by 2018. That is a huge potential for loss. Banks are being urged by many market analysts and other agencies to touch base with borrowers prior to the end of their draw. Some are suggesting that lenders share repayment options and budgeting strategies if need be.

What You Can Do

As your draw period ends, you should be reading up on your loans terms. You want to make sure that you are familiar with every aspect of your loan. It never hurts to contact your lender if you have any questions. Secondly, fine-tune your budget to include the new payment a few months before it is due. This will give you time to find ways to cut back or earn more cash if necessary.

What To Do If You Cannot Pay

The worst thing you could do with any line of credit is to ignore a potential inability to repay. Open communication with your lender is the only way that you will be able to discover all of the repayment or loan restructuring options that may be available to you. Keep in mind that the lender really does not want your home, so they may have an option that fits your needs.

 

About the author: Jerry Coffey

 

Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.

 

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