Saturday, April 18, 2009

HELOCs Past and Present

In the recent past HELOC were smart use of people's own money. Now things have changed dramatically. In this article from the New York Times titled Why Credit Lines Are Drying Up illustrates the changes. Lets take a look -

HOME equity lines of credit, sometimes known as Helocs, have been a popular financial tool for homeowners precisely for times like now, when it helps to have a monetary cushion in case of job loss or some other unforeseen fiscal glitch.

These lines of credit essentially replaced savings accounts as the fallback, with many financial advisers counseling homeowners to keep a $50,000 line open at all times.

But that fallback is evaporating. Lenders in the past year have made it much more difficult to qualify for home equity lines of credit, and even those who do get them will pay a much steeper price in interest — about 5 percent, in fact, which is higher than the average long-term mortgage.

During the real estate boom years, home equity lines of credit commonly carried interest rates that varied in accordance with the so-called prime rate. Those with good financial histories could expect their interest rates to float about one half of a percentage point below the prime rate.

Roughly a year ago, though, banks changed the terms of these loans — along with nearly every loan in which borrowers took equity out of their homes. As the economy and housing market declined, it made little sense for banks to lend money on an asset that was becoming less valuable by the week, and in an environment where borrowers had a diminishing ability to repay.

There have been big changes across the board. The idea of "savings" being equivalent to equity has changed. With falling home values many people's "saving" have evaporated. Now their is a push for have real savings again.

Housing is seen again as a place to live - not a retirement fund, a second income, or a safety net. What a big change from the bubble years.

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