Dear Dr. Don,
In 2004, my husband and I took out a home equity line of credit from a bank for $100,000. We've been paying a little more than $275 a month more than the interest expense. I was looking over our loan agreement and we will owe $98,000 in 10 years. I'm trying to figure this out since we can afford only about $700 a month. I'm terrified that we will lose the house. Would it be possible to refinance, just to pay off the bank and then take a new mortgage and take up to 30 years to pay that off? I can't think of any other way. Thank you in advance. I'm so confused.
-- Janet Juncture
I'm confused, too. I can't see how paying an extra $275 a month for close to 10 years has reduced your loan balance only to $98,000. It's possible that you had an option adjustable-rate mortgage with capitalized interest. But that doesn't make sense since you said you paid interest expense and made additional principal payments on the loan.
It's also possible that you're looking at the loan agreement, which didn't account for additional principal payments while the loan payments were interest-only. Find your current loan balance by checking your statement or contacting your loan servicer
The typical home equity line of credit becomes due with a balloon payment at the end of the draw period, often 10 years. It becomes an amortized loan with the monthly loan payment large enough to cover principal repayment and interest expense over the remaining term of the loan. Review your loan documents to see if either is the case for your loan. The balloon payment almost always triggers a refinancing. Some homeowners can't afford the principal and interest payment on the amortized loan over the remaining loan term and have to refinance, too. If that's the case for you, don't despair. But do begin to look at your options.
You didn't mention whether you have an existing first mortgage to go along with your home equity line of credit. If that is the case, you could look at a cash-out refinancing of your first mortgage to pay off the home equity line. That presumes you have enough equity in the house and credit to qualify for the loan.
You could also refinance the home equity line of credit into a home equity loan or even another home equity line of credit.
You say you can afford $700 a month to service this loan. A 15-year fixed rate mortgage at 3.53 percent, which was the national average as I wrote this column, would translate to a monthly principal and interest payment of $716. Longer mortgage terms would result in a lower monthly payment but higher total interest expense.
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