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Changes in HELOCs

At one time, home equity lines of credit, or “HELOCs” were touted by the mortgage industry as the best way to have quick access to cash.  It was like having a credit card-you could use your credit line, pay it down, then use it again.  And all of the advertising paid off, too, as homeowners across the nation borrowed thousands of dollars against their home to pay for everything from family vacations to college tuition.

Unfortunately for those same lenders, these were some of the first loans on which homeowners began to default-focusing instead on making the payment on their first mortgage.  They reasoned, correctly, that as home values fell, the companies holding their second mortgage would be unlikely to foreclose because they would have to pay off the primary lienholder.  These subordinate lienholders, who had been the first to dole out the cash, became the last to get paid.

Now, according to a story by Kirsten Grind posted on the online site of the Dallas Business Journal, Washington Mutual, Inc. is joining other large lenders in reducing its home equity lines.  How could this impact you?

If you have a home equity line of credit against your home, and if the value of that home has depreciated, you will no longer have access to the full amount of credit originally offered.  As such, if you were looking at using that equity to finance home improvements-or anything else, for that matter-you may have to scale back on your plans-or cancel them all together.

For some, changing or canceling plans isn’t a bad idea in the first place.  Getting high-end appliances and granite countertops might be nice-but is it really worth going into more debt?  Could a trip to Six Flags suffice, rather than a European vacation?  In fact, according to Grind, WaMu is promoting this cut as an effort to protect borrowers from incurring futher risky debt.  Were I a more cynical soul, I might suggest that 1) it’s a little late and 2) it’s more likely that the company’s decision is focused on stopping the hemorrhaging of their own coffers.  I’ll let you reach your own conclusion.

If you are in a position in which investing in your home makes sense or you need a significant amount of cash in a relatively short amount of time, and if your finances are such that they would accommodate it, you have several options available.  If you have enough equity and like the flexibility of a HELOC, they are still available.  Second, keep in mind that this change does not affect fixed-term home equity loans; in other words, the kind of loan that you pull all of the money at once rather than having a revolving line of credit.  As such, that remains a viable option.  Finally, you can also look at refinancing your first mortgage to get the cash out that you need.  This may be the best bet, thanks to recent rate cuts by the Fed that have resulted in more favorable mortgage interest rates.

Whatever your choice, just make sure that you work with a lender who offers truly transparent pricing so that you can make the best short-term and long-term decision for you and your family.