Are Home Equity Lines Extinct?

by Tom Tousignant

in Blog, Home Buying, Refinancing, Wealth Building

Last year, over 1 million homeowners got letters from their Home Equity Line of credit (HELOC) lender telling them that, for a variety of reasons, the HELOC was now ‘Frozen’ and no more draws would be permitted.  (I was one of those homeowners).  I haven’t heard of that happening much lately, but, that’s likely because HELOCs are extinct, or close to it.  They should be on the endangered lending species list, except no banks or regulators care if they survive.

A few years back, banks were judged by how much money they could lend (How’d that work out?), and HELOCs were an easy way to get another $25,000 to $100,000 in loans on the books.  HELOC’s in years past were easier to get than first mortgages, but that has all changed.  Banks are now judged by how much capital they have in reserve, so the thought of a customer writing a check from their HELOC frightens them.  With a single check, a customer could reduce the bank’s reserves by $100,000, for example – to prevent this from happening, a lot of homeowners saw their HELOCs get frozen, and many more people have been told “no” when they asked for a new HELOC.

Last year, one local bank where I live (Charlotte, NC), was offering HELOC’s to 100% of the value of the home at a rate of Prime minus 1%.  Today, that same bank is typical of most others in town, and nationally – their maximum loan to value is 75-80% and the rate is now Prime + 1.0%.  With most appraisals now lower than last year, the access to the equity is much tougher than it was.

For the people who got an equity line last year, the cost of borrowing $100,000 today at 2.25% is only $187.50 per month.  That interest could even be tax deductable for some!  Just go buy a CD (recent rate of 2.28%) and earn $190 per month while paying $187.50 – That’s a cool profit of $30 per year!  Maybe more important than the profit is the liquidity, that is having the access and use of your wealth when you need it.  If you need access to your cash, you probably don’t want it stored in your house in the form of home equity when your HELOC is frozen or you can’t get a new one.

Due to the changing goals of the banks, unfortunately, HELOCs are very scarce these days.  Once a useful tool for financial safety, access to emergency cash, or a source of funds for home improvements, HELOCs are looking more and more like they will only be available to those with more than 20-25% equity in their house. 

This change requires a lot more planning ahead for homeowners as the old plan of just writing a check from the HELOC is not going to work going forward.  Diligently building an adequate emergency fund is more important now than ever.  Recognize that most home improvement projects will have to be paid for in cash or with credit cards now, so the total cost may be much higher with credit card interest rates over HELOC rates.

For homebuyers, more loans with PMI will be used, and FHA loans will continue to grow in popularity due to their lower downpayment requirements and more generous credit score allowances.

If a new HELOC is in your plans, you probably want to talk to a mortgage professional sooner, rather than later, to see what is really available for you and how the HELOC changes impact your plans.

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