I Think Everyone Should Look Into A Home Equity Line Of Credit

[Singuy]

From one article (not dated but not hard to figure out when it's from):
Many lenders are freezing home equity lines of credit, or HELOCs, even those that remain unused. Declining home values and an uncertain economic outlook are making financial institutions tighten their purse strings.

In fact, about 79% of banks surveyed recently by the Federal Reserve are tightening lending standards on HELOCs. If you still have money available in a line of credit but home prices in your area have declined, your lender may be ready to pull the plug on your HELOC.

From another site:
Your lender may freeze or lower your line of credit if your home's value has a significant drop.

From Realtor.com:
Your HELOC’s credit line is not a guarantee, even if you already have it. If your house value plummets and you lose equity, your lender has the right to modify the agreement to adjust for the drop in value. And if your credit score drops significantly enough, the lender can reduce your credit limit.

The bank can change the agreement if conditions change.
The bank can freeze or cut back your HELOC amount.

So you might want to rethink that whole "steal the non-existent equity and let them have the house" plan of yours.

+1

I stand corrected

HELOC will not save you during a housing crisis. It wouldn't hurt you either.

[Singuy]

If the only way to "save" your home is to borrow against it, you are essentially trying to put out a fire by spraying it with gasoline.

How so?

You either use it or you lose it.

Say your house is worth 300k, you have paid it down to 200k, you have a heloc of 40k.

1. You can foreclose and lose 100k of equity that you paid into it.
2. You can fire sale your house and probably end up a with a positive 20k after closing cost....losing 80k worth of equity
3. You can use some heloc, get a job and lose about 15-20k of equity. And lets just say you never ended up getting that job..you will lose the house..same as #1 except you bought yourself a lot of time. That time you bought is probably worth about 20k outside renting an apt from #2.

[disneysteve]

A HELOC is basically a credit card secured by your house. Using the HELOC to pay the mortgage is like using your Visa to pay your Mastercard bill. It buys you a little time but does nothing to actually solve your problem. And now you have to pay back the HELOC with interest. The next month, you do the same thing except then you have to take out enough for the mortgage payment and the HELOC payment. The following month, the amount you need to draw out is even higher since the HELOC balance is growing.

That can only end badly.

[Singuy]

A HELOC is basically a credit card secured by your house. Using the HELOC to pay the mortgage is like using your Visa to pay your Mastercard bill. It buys you a little time but does nothing to actually solve your problem. And now you have to pay back the HELOC with interest. The next month, you do the same thing except then you have to take out enough for the mortgage payment and the HELOC payment. The following month, the amount you need to draw out is even higher since the HELOC balance is growing.

That can only end badly.

Except not paying your visa or mastercard wouldn't lose you a house in which you have plenty of equity in that YOU paid toward. Plus the root of the problem is you lost a job unexpectedly and couldn't find a new one fast enough before the EF is depleted..not a spending/no budget problem in which you can start fixing instantly.

In my opinion, if you are allowed to use your own equity to pay back into the mortgage to prevent the bank from taking ALL of your equity, then why not? Yes, you are being charged double the interest...but at least you will not have a lien on the house and buy you some time.... If your mortgage was around 1.5k/month, that 40k of heloc will buy you at least 1.5 years vs no heloc.

Also I'm not even sure if you can sell your house if the title isn't clean(now there's a lien on the house from lack of mortgage payments).

[disneysteve]

If your finances are so bad that you are having to borrow money to pay the mortgage, there's probably a decent chance that you are falling behind on other bills.

What happens when you're late on bills or miss payments?
Your credit score drops?

What happens when your credit score drops?
Your bank lowers your HELOC credit line or freezes your HELOC entirely.

You can argue this all day and night but depending on debt as an emergency fund will never be a good idea.

[Singuy]

If your finances are so bad that you are having to borrow money to pay the mortgage, there's probably a decent chance that you are falling behind on other bills.

What happens when you're late on bills or miss payments?
Your credit score drops?

What happens when your credit score drops?
Your bank lowers your HELOC credit line or freezes your HELOC entirely.

You can argue this all day and night but depending on debt as an emergency fund will never be a good idea.

Whoa Steve. Heloc is a fail safe..not your EF.

You never know when you'll need a large amount of money, and extracting it out from other places may not be worth it.

The best thing about this product is that it's FREE and 0 maintenance cost. The speed at which you can extract the money is also very impressive.
Your house is a very solid asset..heloc just makes it more liquid without any selling or buying.

[Singuy]

I should put in a disclaimer that my recommendation for a HELOC is for savvy investors/savers only. If you know what you are doing, this is a great product if you know how to use it responsibility. I have closed 2 houses by paying "cash" using equity line of credit which saved me 20k worth of closing cost and bought at much lower than asking price due to the "cash" transaction.

If you are not a conscious budgeter or are living on the edge of financial collapse, this product is very risky for you.

[pflyers85]

Some Banks can also eliminate your home equity if you don't use it within certain period.

Home equity is great for small business owner to meet payroll. Other than that, consumer shouldn't use their home like ATM machine.

That is exactly why the housing market crashed. Not only did you have subprime borrowers in homes they couldn't afford but you had the middle class average Joe and Jane Smith's using HELOC as their personal piggy banks to pay for lavish vacations, luxury cars, and other high end goods they couldn't afford.

[DaveInPgh]

That is exactly why the housing market crashed. Not only did you have subprime borrowers in homes they couldn't afford but you had the middle class average Joe and Jane Smith's using HELOC as their personal piggy banks to pay for lavish vacations, luxury cars, and other high end goods they couldn't afford.

That is one thing I am really proud of. We have never taken any vacations or done any home remodeling that we couldn't pay in full with cash. We took advantage of some 0% same as cash offers, but never without having the cash in the bank to pay it off.

[Petunia 100]

I don't think they can do that because the initial approved line is based on the approved appraisal. In order for them to do that, they have to get a new appraisal and do the entire line all over again.

You are mistaken. HELOCs can be reduced, frozen, or cancelled at any time for any reason at the lender's discretion.

I agree with you that it doesn't hurt anything to have one open, provided you are disciplined and don't use it frivolously.

[sv2007]

If your finances can swing it, margins are better; our margin rates beats HELOC on large amounts. We use it to buy houses on the spot.

[QuarterMillionMan]

Your home should be viewed as your place to live, it should not be thought of as your bank.

[bjl584]

Except that if your home value dropped from 500K to 300K, the bank would probably freeze your line of credit, not let you walk in and borrow against equity that you no longer have. This happened a lot during the housing crisis.

The bank can also lower your credit line if it sees fit based on market conditions.

I think a HELOC is what it is independent of market conditions. The only way anyone would know what your house truly is worth if the market crashed is to do a formal appraisal on your property. I doubt the bank would want to pay for one. If you have good credit and a low or no balance, I doubt they would lower your credit limit.

[disneysteve]

I should put in a disclaimer that my recommendation for a HELOC is for savvy investors/savers only.

Sorry, you don't get to make up a "disclaimer" after you've already posted stuff that directly contradicts this.

Now you are saying that only "savvy investors/savers" should take a HELOC but the very title of this thread suggests that "everyone" should consider a HELOC. Then you go on to say, " if people are living paycheck to paycheck, they can't really tap into their retirement account and their EF is abysmal...I feel like Heloc is their only saving grace". Do you mean to say that folks living paycheck to paycheck with an abysmal EF would qualify as savvy investors/savers who should consider a HELOC? Not to mention the fact that those paycheck to paycheck folks probably wouldn't even qualify to get a HELOC.

I think you need to give it up and move on.

[disneysteve]

I think a HELOC is what it is independent of market conditions. The only way anyone would know what your house truly is worth if the market crashed is to do a formal appraisal on your property. I doubt the bank would want to pay for one. If you have good credit and a low or no balance, I doubt they would lower your credit limit.

I addressed this in post #14.