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.