According to CoreLogic analysts, borrowers who have home equity lines of credit (HELOCs) on their homes as well as a traditional mortgage are more likely to be underwater than those who have not borrowed against their home[1]. It makes sense: if several years ago you had $50,000 worth of equity and you borrowed part or all of it using a HELOC, odds are good that your home has lost at least that much in value thanks to today’s tumultuous market. In fact, 40 percent of underwater borrowers (4.5 million people) have HELOCs on their homes. And the negative ramifications are significant, not only impacting those borrowers’ ability to borrow for other things like cars or small business loans even if they are in good standing on their mortgages, but also preventing short sales and loan modifications. These borrowers are also considered to be “far more likely to walk away from their homes” and with much more dire consequences since HELOCs are not protected under the Mortgage Forgiveness Debt Relief Act, which shelters many borrowers to a limited degree if they choose to simply return their home to the lender rather than continue paying the mortgage.
These numbers are bad news for borrowers who had planned to borrow on their homes’ equity as a retirement supplement or to send kids to college[2]. HELOCs are extremely difficult to get these days because lenders cannot bank – literally – on a home retaining its value and therefore its equity. When you add in the new, risky profile associated with HELOC borrowers, you get a bad combination that sends lenders running in the opposite direction.
Would you take out a HELOC in today’s market?
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[1] http://money.msn.com/home-loans/article.aspx?post=6dcb05de-c2f9-46c5-80a1-3ec0ad16e25f?ocid=fbmsnre
[2] http://www.tulsaworld.com/news/article.aspx?subjectid=15&articleid=20110814_15_E2_bDearA188209
“Would you take out a HELOC in today’s market?” What’s a HELOC? It’s hard to imagine such a mythical creature…
A HELOC is the last thing that any of us should do at this time. There is so much uncertainty not only in real estate markets, but in the economy as a whole and even in the global fiat currency system. We are in uncharted waters and it is very dangerous for homeowners to carry any more debt than they now have. In fact, this is a time to be thinking about ridding oneself of as much debt as possible to be better positioned to ride out whatever lies ahead.
Take on a HELOC only if you are planning to dump the property soon anyway.
Everyone should take out a heloc today under specific circumstance. First of all you have to have the equity in the proeprty necessary to be allowed by the bank to take it out. You have to have a project ready to “invest the money in”, and you have to be comfortable at say 41 DTI to afford the heloc and the mortgage.
Money is so cheap these days it would be a crime NOT to use it and invest it at much higher returns than the cost of capital in many types of real estate. Here in The east sf bay, you can get for sure 7 cap. And that is before taxes. It get better after taxes.
Kind regards
As inflation hits, you’ll wish you had borrowed more at today’s cheap interest rates. HELOC as much as you can, buy gold & silver with it, cash it in in a couple years and make a much larger return than you could have anywhere else. 5% is nothing to pay when there’s much more to be made. What’s so great about being debt-free if you have nothing working for you when you’re sleeping???
Taking out a HELOC is no guarantee you can access the line when and if you need it. Lenders can and do freeze HELOCs at a moment’s notice. Read the fine print; a HELOC is fully under the control of the lender.