Thursday, 23 April 2009

Why Home Equity Credit Lines Are Drying Up

As most of readers know, HELOC (Home Equity Line of Credit) is line of credit against equity of your residence. During real estate bubble era (= easy credit time), HELOC was US citizen's second wallet. Combined with cash-out refinancing, MEW (Mortgage Equity Withdral) was a key driver for US economy.

However, as value of the house declined sharply, HELOC was often cancelled or reduced dramatically.

While HELOC was one of the reason real estate bust, it is very convinient tool for emargency fund (unless you spend all on luxury car or exotic travel).

This is article from New York Time about status of HELOC.

Why Credit Lines Are Drying Up

Summary is:

- Lender used to offer HELOC at or below Prime Rate (currently at 3.25%). However, its bottom rate is capped at around 5%, higher than existing 30 year mortgage rate (at around 4.85%). In the risky market like California or Nevada, this can go up higher.

- Lending guideline is quite tight - 1) 2+ year documented salary; 2) minimum 20% equity on tight appraisal (30%+ for declining market); 3) 720+ credit score; 4) debt to income including HELOC has to be 31% of documented income.

While rate is not as favorable as before, I think keeping HELOC is good idea to prepare for emergency. Additional benefit is that having unutilized HELCO has position impact on your credit score (= low credit line utilization).

For those who have HELOC at or below prime rate, you are lucky one! However, please be careful. Especially at declining market or with negative credit reporting, you may lose all or some equity line. If you know you need HELOC money in near future, it is safe to cash it and keep in your saving account.

Happy Investing!!!!!!

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