During the housing boom, billions of dollars worth of home equity lines of credit (HELOC) were used by consumers. HELOCs were doled out like candy in the housing heydays. Financial mortgage lenders were using less restrictive criterion to approve home equity loan applications. In the current atmosphere, the home equity line of credit equations have changed.
Now mortgage lenders have tightened their lending policies, making it more challenging for consumers to access new lines of credit. Much of this is the result of the subprime mortgage crisis, the credit crunch, the economic environment, and other factors. This year many financial institutions have made unprecedented moves such as, JPMorgan Chase, Bank of America, Wells Fargo, Countrywide, and Washington Mutual, which are some of the lenders that have frozen existing clients’ home equity lines. In other cases, clients have had their lines of credit reduced by as much as 40 percent. This has been a particularly unpleasant shock to many borrowers.
Home equity lines of credit and home equity loans are supported by the homeowner’s equity in the house. The equity in the home is the difference between what the home is worth and what the homeowner owes on the property. Once you are approved for a credit line, you can access the cash on an as-needed basis. Basically, a HELOC is a revolving line of credit, similar to a credit card, and the interest rate fluctuates over time. However, there are lines of credit available that are fixed for a specific period of time, after which the interest rate becomes variable or you have the option of converting it to a fixed home loan mortgage.
With home equity loans you receive a set of checks and even a type of debit card, the equity credit used is paid off over time. Since 2001, homeowners have taken out more than $2 trillion in home equity loans. In 2007, homeowners tapped $355 billion in home equity lines of credit. However, some of those HELOCs have now been frozen. Here are some solutions to keep cash flow coming in the face of a frozen HELOC:
- Appeal the mortgage lender's decision
- Contact other HELOC lenders
- Build a 3 month emergency cash reserves
- Stop unnecessary spending
- Become fiscally responsible
In the new century, HELOCs are seen as a good financial planning tool, a safety net for emergencies. Many financial planners advise their clients to open a line of credit and to tap it when financial necessity arises.