By Peter McDougall, BankingMyWay
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.
So what's a homeowner to do? Drain the remaining balance on your line of credit and start paying interest right away or potentially lose access to your funds altogether? Before rushing off to withdraw the money from your line of credit, consider whether that approach makes the most financial sense for you.
Evaluate your risk
A bank can freeze an existing HELOC if the amount of equity remaining in the home, as measured by the difference between the credit limit and the home's value, declines by half. Say you own a $200,000 home with a $100,000 mortgage and a $50,000 HELOC. That leaves $50,000 in equity in the home. A drop in home value to $175,000 would leave only $25,000 in available equity, a 50% decline. Your lender would have grounds to freeze your HELOC.
You're at greater risk if you recently bought a house with little or no money down, or if your neighborhood has experienced double-digit declines in home values. Call your lender and ask what its loan-to-value standards are for new HELOCs. If you are above the new limit, you may be at risk.
If you'll have to access the funds from your existing HELOC in the next few weeks, consider withdrawing what you need and stashing it in a high-yield money market account or short-term certificate of deposit, or CD. This is a valid approach only if you have known expenses, like college tuition or a renovation that is already underway. But bear in mind that once you withdraw the money, interest charges and debt payments will start up.
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