A Korean-American man, only identified by his last name Kim, recently received a letter from his bank. The letter asked Kim, who was approved for home equity line of credit (HELOC), to choose between paying back his loan in full or making payments over the next 10 years, which comes with a 5.99 percent interest rate.
Unable to come up with the money to make a full payment upfront, Kim helplessly chose to make payments for the next decade. His newly financed payment was doubled the amount of what he paid before the expiration of his HELOC.
“I may have to take 10 years only to pay for the interest,” Kim said. “I want to refinance the deal, but HELOC refinancing is far more difficult, so I have no option but to live with the significantly increased payments in the future.”
Kim is only one of many Korean-American homeowners whose monthly payment recently rose substantially after their HELOC deals were recently restructured. Some homeowners saw their payments double or even triple, which adds a minimum of few hundred dollars in addition to what they have been paying.
Those within the real estate business say that some homeowners have even failed to make the payment in recent months because of the sudden change.
HELOC essentially functions like a credit card for homebuyers, who are allowed to lend a certain amount for the life of their home loans. During that time, they are able to withdraw money as they need it.
Most financial institutions allow homeowners to just pay the interest for the first seven to 10 years, but after that initial period, they often exercise the right to increase the interest and make the demand for their clients to pay for the remaining balance in full.
The biggest problem for clients such as Kim is that once the HELOC deal expires, there is a danger that the payment amount could exceed far above their expectations as they not only have to begin paying for the home and its interest, but also that the interest rates recently continue to soar.
For Kim, his initial payment was only at $604 per month when he was approved for $100,000 of HELOC in 2006. His prime rate at the time was 7.25 percent, but it dropped further to 3.25 percent in 2009, dropping his monthly payment to only $270 a month, although his monthly payment increased to about $300 earlier this year.
However, Kim is now due to pay $1,110 every month from 2017 with 10 years remaining in the deal as he still owes $100,000 for his home as well as the interest rate that increased to 5.99 percent. In other words, his monthly pay will be doubled the amount of what he first paid when his HELOC deal was approved 10 years ago.
“A lot of Korean-American homeowners bought their homes between 2005 and 2006,” said Wells Fargo loan officer Jennifer Kim. “That means a large number of them are now receiving letters that are notifying them about the expiration of their deals. The monthly payment commonly doubles or triples once HELOC expires. Even though many homeowners try to refinance the loan, it’s difficult for them to do so as they do not meet the income standards.”
MK Lending loan officer Chi-hoon Park added: “The bigger problem for homeowners is that they do not know that they need to begin paying for both their principal balance and their interest. Most of them were initially approved for about $200,000 and some customers have HELOC deals that are larger than their mortgage loan.”
Those within the business also worry that many homeowners may even experience seizure of their properties once their HELOC expires as most of them made the purchase from as early as 2005 to 2009.
“The homeowners who were in their 50s when they were first approved are getting the worst of the aftermath,” said SNA Financial chief Matthew Nam. “Many of them have little to no income, so it’s difficult for them to refinance. They can try to resell their homes and make payments that way, but home prices and rent have gotten so high over the years that they can’t even find new homes.”
By Sung Cheol Jin
