What you need to know about your HELOC in the post sub-prime era.

If you have a HELOC (Home Equity Line Of Credit) you may have received a notice that your line has been temporarily frozen or withdrawn.  If you haven’t received this letter it is possible that you will.  Like many people (myself included) you probably didn’t read the twelve pages of fine print in the loan documents that stated that the bank can freeze your line of credit basically at their discretion. Many banks are exercising this option because the vast majority of defaults just happen to be with people who have a HELOC, so these intuitions are rightly trying to stem the rising tide of defaults and unfortunately some good people get hurt in the process.  Also some areas of the country are experiencing value reductions (Southern California, Southern Nevada, Arizona & Florida to name a few) so the high LTV (Loan to Value) HELOCS are also suspect.  These lenders know that the lower the amount of equity a person has the greater the likelihood is of a foreclosure.  

I know of many people who use their HELOC like a bank account.  They get paid with bonuses and commissions and pay down their line then draw off it if they have laps in income.  This method is obviously no longer advisable.  I recommend keeping sufficient reserves in cash and paying down your HELOC as you can.  I do expect this situation to resolve itself later in the year and for the lines to be reactivated but if you must have an active line give me a call as there are banks who are actively  pursuing this business.  Also refinancing your line into a fixed 2nd or combing the 1st and 2nd into one loan may also be a possibility.

Posted by DarrinJ at 2/21/2008 3:40:00 AM
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