Wednesday, January 28, 2009

Home Equity Basics

It is good to review basics once in a while. Some may not even know the basics - like what equity means (it means the difference between the market value of a property and the claims held against it). During the bubble homes were ATMs - buy money and start withdrawing money. The funds seemed unlimited. Even those who put 0% down still managed to withdraw equity. The basics seemed not to exist during the bubble - like one needs equity to withdraw it. Now those old basics are back.

It is important to remind ourselves of them. The Maui Weekly has an good article titled Home Equity Line of Credit that gives us a good reminder about what a HELOC actually is. Lets take a look -

Most people believe that if they have a home equity line of credit, it can be accessed anytime the homeowner requests it; however, this is not the case.

Home equity loans, or HELOC, can have limits placed on them by lenders. Those limits are justified by lenders, who argue that declining home values make a HELOC more risky.

However, according to the Federal Deposit Insurance Corporation (FDIC), there are rules that must be followed when a lender wants to take such an action. FDIC rules require that the lender demonstrate a significant decline in the value of the property. A significant decline is an equity decline of at least 50 percent.

It is important to remember that the term “equity” does not mean the total value of the home. Equity can be reduced by an increase in the mortgage balance, or if home prices fall.

What can you do if your lender limits access to your HELOC? First, be sure you have been making your mortgage payments on time, and that you are paying the full amount due each month. Failure to do so gives the lender the right to limit your credit access.

Second, tell your lender that you want to review their decision to limit or suspend your line of credit based on a decline in the value of your property. Some lenders use an automated computer program to review property values, and mistakes can be made in that process.

Homeowners have rights regarding the HELOCs - but so do the lenders. Not keeping up the mortgage payment - goodbye HELOC. Properties that have lost 50% of their previous values - goodbye HELOC. For those applying for HELOCs - the appraised value is most likely declining everyday.

For example - Last year you might have owed $140,000 on a property valued at $200,000 and easily qualified. Now he property is only valued at $175,000 and you are being turned away. It is good to understand why.

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