13 Mar

How Good of a Backstop is Your Home Equity Line

March 13, 2009

Nothing is easy in the current banking world and one of the latest casualties “waiting to happen” is the Home Equity Line of Credit (HELOC). Home equity lines have, for better or for worse, been a way to tap the equity in your home for things like remodeling or buying a car. Unfortunately, these home equity lines were also abused in the credit crunch we’ve seen. Now, even the homeowners in good financial standing are getting hit from another angle. Take me, for example, I’ve got good credit and decent equity in my home. I do have a home equity line available and currently I owe nothing on it. In the past, I’ve bought a vehicle and used the home equity line as a funding source. I thought it made sense since I got a relatively low interest rate and there was deductibility on the interest. I have left this home equity line open as a “just in case I need it” backup plan. I think, given the economy and current unemployment numbers, a lot of borrowers just want the comfort of knowing they have a line of credit available for emergencies.

The problem is that if your home equity line happens to come up for renewal – you may just find that it is not a gimme. The banks are tending to be somewhat more “stringent” in their willingness to loan money. A few things to keep in mind:

  • The banks used to loan up to 100% of a home’s value – now the number is usually in the 70-80% range.
  • Also recognize that if the value of your house has dropped, so has your ability to borrow money against it.
  • So, if you don’t have much equity in your home and the value has dropped, it may be that this 70-80% range has pushed you out.
  • Your bank is also getting much more diligent about your debt-to-income ratio. They are looking more carefully than ever at the amount you owe. The general rule of thumb they are using is that your total debt (which is total monthly payments) should not exceed 36% of your take-home pay.

So, if your home equity line is coming up for renewal – here’s what I’d be thinking:

  • Make sure you are very clear about your personal financial numbers: what your home is worth, what you owe, and how much of your income is spent on your monthly bills.
  • Pay down other debt if at all possible – you want to have as much unused credit showing up on your credit report as possible. This is the perfect time to get one of the free credit reports and diligently review it. Also, find out your FICO score and take steps to improve it if needed.
  • Don’t wait until the last minute if the line of credit renewal date is quickly approaching. Be proactive and start 3-4 months in advance on the paperwork.

One other thing – the expiration date of the line of credit may not be the only thing that gets your home equity line of credit cancelled. We are now starting to hear things like “the value of your property has declined, so we are canceling”. This can even occur when you have more than enough equity in your home or if your credit history is fine.

Just as an FYI, there is an appeal process that can be done. Much more preferable, however, is to be proactive and take a good review of your current situation.

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