Leave my HELOC alone!

Another post about HELOCs getting closed by lenders. Today's article has new advice beyond the standard "how to fight for your HELOC info (summary - new appraisal, new bank, find money elsewhere, forgetaboutit).

One standard in these articles is for people to extract all the equity out before the line gets closed. Do they realize this is borrowed money and depending on their contract they most likely have some monthly payment - either just interest or principal and interest? Do they not realize that HELOCs usually have variable interest rates - so as rates climb so will the payments?

Here is an article from the South Florida Sun-Sentinel via Philadelphia Inquirer called Lenders limit or freeze home equity lines. First a look at some numbers, then to the financial advice -

In the first three months of 2008, losses on home-equity lines of credit nationwide rose to $1.3 billion from $204 million a year earlier, a 537 percent increase, according to the Comptroller of the Currency in Washington. The agency charters and regulates banks.

...
In fact, Americans now have the lowest level of home equity - market value minus mortgage debt - since the end of World War II, the Federal Reserve said earlier this month.

...
George Richardson, 45, of Wilton Manors, Fla., found out last month that lender USAA Federal Savings Bank froze his $35,000 line of credit. He said the lender did not consider his credit score or appraise his house.

...
Richardson and other brokers say people who still have access to a home-equity line of credit should consider drawing on the money now and depositing it into an interest-bearing savings account.

Boca Raton financial planner John Carrig said that was not necessarily wise because borrowers probably would not be able to earn enough in interest to offset the monthly cost of the equity line. In addition, people would have to report the interest on their annual income-tax filing.

This is the first article we have come across that had any kind of caution against draining the equity out of your house. There are a few people who have the time and skill to transfer the funds around to actually make the taking the equity worthwhile. But for most of us, we will simply fall further behind.

It was easy to feel like a financial whiz during the Great Housing Bubble. That was a time of easy credit and careless lending. That time is now gone.