Why Your Home Equity Line of Credit Could Be a Ticking Time Bomb

NEW YORK (MainStreet) — Remember that home equity line of credit (HELOC) you took out a few years ago? There may be an unpleasant surprise lurking in the not too distant future. Those interest-only payments you've been making may suddenly require interest and principal payments – or worse yet, the loan may be maturing, requiring you to pay off the entire balance or scramble to refinance.

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Nearly half of all HELOCs with balances at the end of 2013 were originated between 2005 and 2007, according to credit information company TransUnion. Many of those were issued with ten-year maturities or similar draw periods. At the end of a draw period, consumers can no longer borrow from the line of credit and must begin repaying the outstanding balance with fully amortized payments. If the HELOC matures at the end of ten years, the full balance is due.

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"Home equity lines of credit were quite popular during the housing boom in the mid-2000s," said Steve Chaouki, head of financial services at TransUnion. "For many people, HELOCs represented a low-interest rate opportunity to borrow against the value of their homes, which were rapidly appreciating at the time. HELOCs generally had lower interest rates than credit cards or other loan types, and that interest was often tax-deductible."

As of the end of 2013, nearly 16 million U.S. consumers held about $474 billion in balances on HELOCs. More than half (52%) had balances exceeding $100,000.

"The financial shock associated with a HELOC payment increasing to cover both principal and interest can cause liquidity issues for some borrowers; this dynamic is driving significant concern in the lending marketplace," said Chaouki. "Our study indicates that up to $79 billion of those HELOC balances could be at elevated risk of default in the next few years."