It seems you may need an emergency fund after all. A HELOC, (home equity line of credit), may not be available to you in case of emergency.
Countrywide Home Loans sent letters to at least 122,000 homeowners nationwide informing them they can no longer draw on their home-equity lines of credit. Many homeowners rely on these pay-as-you-use-them loans to finance things like remodeling or college tuition, or to use for emergency expenses.
As home prices continue to decline it seems lenders are hedging their bets against further loss by freezing the HELOCs of maxed out borrowers. In the past, lenders provided borrowers with credit lines equal to 100% of the value of their homes. But the past is the past and today is a very different economic environment than yesterday. Suddenly lenders do not want to be to be left holding the stick for borrowers who have pulled all of the value out of their homes. As home prices continue to fall and credit markets are crunched, lenders will provide money much less freely. Lenders are returning to previous credit rules by forcing borrowers to keep at least 20% of the value in their homes. Yesterday you could get a HELOC for 100% of the value of your home. Today your credit line may be capped at 80% of your home’s value. If you’ve already been granted a HELOC that goes above this margin it may be frozen.
Those homeowners who took out credit lines for home repairs or other long term, large scale financial transactions may be in big trouble. You may be half-way through home repairs when your credit line is frozen. Leaving you with half a kitchen, half a bathroom, etc.
And what about those homeowners who utilize HELOCs as an emergency fund? With the new lending policies, if you have sub-par credit or own less than 80% of your home’s value, you may not be able to access the money. This may force a lot of homeowners to reconsider their financial strategies. Do you maintain an emergency fund or do you rely on the value of your home in case of an emergency?
To learn more about the freezing of HELOCs go here.
5 thoughts on “Banks Freeze HELOCs”
I have heard many people state that they do not need an emergency fund precisely because they could access a HELOC if needed! This news certainly leads to the demise of that mindset. People need some insurance that the money will be there if needed, and that only comes with a well-stocked emergency fund.
I personally think this is great! It’s a way for banks to limit the trouble people can get themselves into.
Full disclosure: I don’t own real estate, so I don’t have a mortgage or a HELOC.
@jerry — I totally agree. In an emergency the last thing you want to think about is going into debt. An emergency fund is definitely the safest way to go.
@savingdiva — I would actually prefer it if banks never gave maxed out borrowers HELOCs in the first place, but I do understand how lenders have gotten themselves into sticky situations from which they now need to protect themselves.
I am curious to see how this “freeze” is going to affect those who bought the Money Merge Account (using HELOC to pay off mortgage fast).
Yes some banks are freezing HELOCs but at the same time some banks are making it easier for their client to get HELOC if they are using the Money Merge Account. Ufirst has been very proactive in helping those clients that have found their HELOC frozen by countrywide. As of right now no other banks have frozen any mma clients HELOCs.
The focus should be on the banks and financial institutions that are complaining about the state of affairs while at the same time giving their CEOs $400,000,000. bonus’ (i.e. citi group and countrywide etc.) The hearings are going on right now on cspan. Warning have a puke bucket handy.