IN THE REAL ESTATE BOOM YEARS OF THE EARLY 2000s, millions of homeowners were attracted to interest-only loans. Many of these loans came with a 10-year interest-only period followed by a repayment period of 20 years. But as these loans reset, the monthly payments for many will rise significantly.

Most borrowers who financed with interest-only loans expected to refinance or sell their homes before the interest-only period ended. Many of have not been able to sell or refinance because of a lack of sufficient equity. Now, as these loans begin to reset over the next few years, there could be another mini crisis looming.

Some of these homeowners used an interest-only option as their primary mortgage. Many took out equity lines of credit as a second loan during the boom years to leverage the increasing value of their property and finance home improvements, college tuition or myriad other goals.

Homeowners with interest-only first mortgages generally owe the most and will be in for the biggest shock as their loans reset. For example, the monthly payment on a $400,000 loan at 6 percent interest, an average rate back in 2005, is only $2,000. But when this loan resets the new monthly payment will be $2,966.

If the homeowner in the above scenario has sufficient equity to refinance, a $400,000 loan on a new 30-year fixed at today’s average rate of 4.25 percent would be just $1,968. But that is a big “if,” and there remain many homeowners who cannot refinance because of a lack of sufficient equity or other issues with qualifying for a new loan.

For the millions who took out equity lines during the boom years, the pain from the reset will not be as severe, as the loan amounts are generally far less than on first mortgages. The bigger question is, how many took out these loans with no idea that the payments would reset after 10 years?

The payment structure is in the loan agreements these borrowers signed, but how many really understood the terms? In the boom years, banks saw home equity lines as a tremendous profit center and were selling them vigorously through their branch networks. Quite often the bank personnel selling these loans had little training in the intricacies of the loans and were ill-equipped to explain the terms to borrowers. I have to wonder how many homeowners out there have equity lines yet have no idea their monthly payments are about to go up, in some cases by hundreds of dollars.

There are options for these homeowners. Values are steadily increasing, so the odds of refinancing or selling without taking a loss are improving. There is also help in some states like California that have government entities set up to assist distressed homeowners.

The key is knowledge. Review your loan documents carefully to determine the terms of any resets. Consult with a real estate professional to determine the true value of your home so you can make a wise decision regarding refinancing or selling.

Finally, whenever I reference interest rates or loan terms, my compliance folks begin to get nervous. So please know that any interest rates or terms mentioned in this column are meant for illustrative purposes only and are certainly not intended as an offer to lend.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.

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