HELOC – Money Heaven or Hell?

HELOCs, home equity loans that generally are taken on homes have recently been called by a lot of banks on people with good credit.  What has happened is that the pendulum has swung completely the opposite way that it was for a lot of lenders.

For some people, they have been using their HELOCS as an ATM machine.  The problem, they are finding is that it isn’t their money.  They are finding that their loans are being frozen and whatever financial plans they have made spending the HELOC money will have to be put on hold, in some cases, indefinitely.

Why are the HELOCS being frozen?  Banks and lenders are running what is called automated valuation methods (AVM) and they are looking at from a numbers point of view what your property value is compared to your outstanding loan.  It doesn’t matter if you are a good credit risk or not.  They are just changing the qualification numbers on you and probably for a good reason.

See, for years, lenders have not been enforcing appraisals on homes.  I mean REAL apprraisals where a human being goes through a house and actually takes pictures, knows what he or she is doing and goes on to look at the neighborhood and make a realistic valuation.  The chances are if your HELOC was called was that their software might have undervalued your area because they were showing other competitive sales lowering the market value.  According to Regulation Z, from the Federal government, they are entitled to do this so there is no use crying over frozen spilled milk (or frozen HELOC money). It is THEIR money they are lending you and they want to protect their investment.

Now, the downsides and upsides of this are both heavenly and hellish:

1.  The lender may let you dispute the freezing of the HELOC by supplying them with proof of employment, possibly your tax returns, and a new appraisal.  The new appraisal has to be through somebody they are doing business (they are telling you who) and depending on where you live it can run you between $400-$600.

2.  If you don’t want to do that you can look for a HELOC from another lender.  There may be other lenders out there who will be happy to give you a line of credit.

3.  Your credit score may suffer whether you like it or not because a lender has clobbered your line of credit, the HELOC.  That may matter very little if you have a great FICO score of 800 and have it lowered to 770.  It may make a difference if you are on the border line with deciding whether or not you want to refinance and risk getting a higher rate.

What makes this heavenly or hellish, dear reader, is that you need to decide at this point what is right for you.  If your property values have dropped substantially, the bank is trying to keep you from going into negative equity.  If it looks like the property values are stabilizing and you are planning on needing the cash for renovations on the home, it may be worth shelling out $500 and trying to get the HELOC re-established.

In some cases, your property values may be higher than you think.

In any case, watch your spending if you do get the HELOC, especially if there is a variable rate.  You don’t want to move deeper into debt.  You are climbing to Heaven, not away from it!

Kim Greenblatt

Questions or comments? Let me know about them! Thanks for taking the time to visit and for more information or to get back to the beginning of the blog, go here.

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