Home Equity Lines of Credit

The term “HELOC” is becoming a dirty word. Short for Home Equity Line Of Credit, HELOCs were all the rage for the first six years of the 21st century.

But lately, the push from banks to get homeowners to sign up for HELOCs has subsided. Could it be that the toll from using homes as piggy banks is adding up? Yes. Banks are suddenly getting scared. Very scared.

Bankers rode the wave of over-the-top lending led by the subprime mortgage industry. All seemed well. Gold seemed to grow on trees. Then, the subprime mortgage market suddenly collapsed, causing the media to declare that the entire real estate industry was in a state of meltdown. This misinformation set in motion a series of events that caused property values to drop in many areas of the country—seemingly overnight!

Bankers dropped their coffee and started to shake. Their entire portfolio of HELOCs suddenly seemed very fragile indeed. And bankers didn’t want what happened to the mortgage industry to happen to them. So what are bankers doing now? They’re sending out letters to homeowners with HELOCs that read something like this:

"Dear Homeowner:
Because property values in your area have decreased so dramatically this year, we are forced to reduce the amount of your Home Equity Line of Credit from $50,000 to $25,000. We apologize for any inconvenience."

Or even worse:

"We are forced to relinquish your entire Home Equity Line of Credit."

Homes are not piggy banks and shouldn’t be treated as such. Homes are investments that need to be treated with respect. If you start to disrespect your investment, you are heading down a path through a dark forest filled with hungry wolves.

DAVE'S RULE OF THUMB: YOU CAN ONLY TAKE EQUITY OUT OF YOUR HOME ONCE...WHEN YOU SELL IT!

Many people—maybe even you—have HELOCs and if you're one of those people, you may be getting this letter if you haven't already. Many people are totally unaware that banks can even do this. But it’s right there in the fine print. It usually reads that the bank has the right to “relinquish on demand” your Home Equity Line Of Credit.

If you are heading into trouble by getting close to maxing out a HELOC, the safety net may soon be ripped out from under you. We’re living in a different world from the one we were in 2-3 years ago. But this doesn’t mean that the real estate market is crashing. Far from it. Things are just different now. Growth like that just couldn’t go on forever.