Banks spent the last decade trying to persuade everyone who came through their doors to take out a home equity loan (HEL) or a line of credit (LOC). Now they've changed their minds. Sort of.
Financial institutions are still marketing these products, but they've also started freezing accounts of current customers.
Countrywide suspended 122,000 accounts.
USAA pulled or reduced 15,000.
Chase, National City, Washington Mutual and Suntrust have mailed out HELOC Freezes
And the pending freezes list includes Bank of America and CitiGroup.
I haven't read of any lenders calling the loans due. What they are doing is tightening their lending practices. Loans that were already approved and in place, with the home as collateral, are riskier now that home values have fallen almost everywhere.
Who´s in trouble? Anyone who has an outstanding HELOC, or is trying to get one, whose outstanding mortgage loans would then exceed 80% of their equity. Let´s look at an example. The Browns bought a $300,000 home. Between their down payment and the monthly payments they´ve made, their loan is now only $200,000. They took out a $50,000 Home Equity Line of Credit last year to provide some major maintenance to the structure.
Now their home value has fallen to $275,000. If they were able to use their entire $50,000 HELOC, they would owe more than 80% of the value of the home (LTV: loan to value). They owe $200,000, plus however much of the HELOC they actually use.
Fortunately, the Brown´s didn´t go hog wild. They´ve drawn from their HELOC and spent only $20,000 of it toward home repairs. So they now owe the lender a total of $220,000—which happens to be exactly 80% of $275,000. Are they in trouble, or not?
Their lender had every right to freeze their HELOC. They´re at the all-important 80% LTV ratio. However, if their lender so chooses, they may allow the Browns to borrow up to 120% of their value, or $330,000. That isn´t likely to happen, but the lender does have a choice about whether or not to freeze the Browns´ HELOC.
For those using HELOCs to help pay off their mortgages faster, people who have put the largest part of their mortgage into a HELOC (which is usually reserved as a second mortgage position) may have to do a little scrambling or rearranging. Some just now signing up for the popular mortgage acceleration program provided by United First Financial are no longer able to acquire the type of HELOCs UFF recommends. Thos people are being shuttled toward other types if credit lines or even plain old credit cards.
Others, such as those following the guidelines in Let Your Mortgage Make You Rich! will be just fine, for they´ve been told from the beginning, "Withdraw an amount roughly equal to a month´s take-home pay." Put it on your mortgage, lather, rinse and repeat.
Our home has dropped from a high of $572,000 in April 2007, to Zillow´s estimated value today of $431,500. That´s still one and a half times what we paid for it six years ago, so we have wiggle room when it comes to borrowing more money. Since we´ve been using our HELOC to chunk down our mortgage, it´s worth nearly three times what we still owe on it.
But I always say, it doesn´t really matter how much your home is worth, unless you´re borrowing money or selling it. Right now, quite a few people are going to be borrowing less!
Financial institutions are still marketing these products, but they've also started freezing accounts of current customers.
Countrywide suspended 122,000 accounts.
USAA pulled or reduced 15,000.
Chase, National City, Washington Mutual and Suntrust have mailed out HELOC Freezes
And the pending freezes list includes Bank of America and CitiGroup.
I haven't read of any lenders calling the loans due. What they are doing is tightening their lending practices. Loans that were already approved and in place, with the home as collateral, are riskier now that home values have fallen almost everywhere.
Who´s in trouble? Anyone who has an outstanding HELOC, or is trying to get one, whose outstanding mortgage loans would then exceed 80% of their equity. Let´s look at an example. The Browns bought a $300,000 home. Between their down payment and the monthly payments they´ve made, their loan is now only $200,000. They took out a $50,000 Home Equity Line of Credit last year to provide some major maintenance to the structure.
Now their home value has fallen to $275,000. If they were able to use their entire $50,000 HELOC, they would owe more than 80% of the value of the home (LTV: loan to value). They owe $200,000, plus however much of the HELOC they actually use.
Fortunately, the Brown´s didn´t go hog wild. They´ve drawn from their HELOC and spent only $20,000 of it toward home repairs. So they now owe the lender a total of $220,000—which happens to be exactly 80% of $275,000. Are they in trouble, or not?
Their lender had every right to freeze their HELOC. They´re at the all-important 80% LTV ratio. However, if their lender so chooses, they may allow the Browns to borrow up to 120% of their value, or $330,000. That isn´t likely to happen, but the lender does have a choice about whether or not to freeze the Browns´ HELOC.
For those using HELOCs to help pay off their mortgages faster, people who have put the largest part of their mortgage into a HELOC (which is usually reserved as a second mortgage position) may have to do a little scrambling or rearranging. Some just now signing up for the popular mortgage acceleration program provided by United First Financial are no longer able to acquire the type of HELOCs UFF recommends. Thos people are being shuttled toward other types if credit lines or even plain old credit cards.
Others, such as those following the guidelines in Let Your Mortgage Make You Rich! will be just fine, for they´ve been told from the beginning, "Withdraw an amount roughly equal to a month´s take-home pay." Put it on your mortgage, lather, rinse and repeat.
Our home has dropped from a high of $572,000 in April 2007, to Zillow´s estimated value today of $431,500. That´s still one and a half times what we paid for it six years ago, so we have wiggle room when it comes to borrowing more money. Since we´ve been using our HELOC to chunk down our mortgage, it´s worth nearly three times what we still owe on it.
But I always say, it doesn´t really matter how much your home is worth, unless you´re borrowing money or selling it. Right now, quite a few people are going to be borrowing less!
