Home Equity Lines- Use Them if You've Got Them

Fannie Mae and Freddie Mac, also known in the lending world as "the agencies" or GSE's (government sponsored enterprises), have amassed quite an extensive list of areas known as declining markets. FNMA & Freddie Mac have both restricted the maximum loan-to-value and combined loan-to-value ratios for properties located within a declining market to five (5) percentage points less than the maximum permitted for the selected mortgage product. Please see FNMA Announcement 07-22 dated Dec. 5, 2007 and Freddie Mac Bulletin dated Nov. 15, 2007 for more detailed information. Visit this link for an extensive look at declining markets: http://www.ofheo.gov/media/pdf/3q07hpi.pdf Many lenders are going as far as closing HELOC'S (home equity lines of credit) for many homes located in these areas. For example: An individual buys a home for $300,000 and makes a down payment of 20% ($60,000). A few months later he or she decides to consolidate some debt and takes out a $60,000 HELOC. This is a line of credit that can be used at any time so the home owner only elects to use $20,000 of the HELOC now and plans to use the rest at a later time. Let's look at this scenario in a declining market. The $300,000 home depreciates to $250,000. Now the lender is $260,000 into the home owner with a $250,000 home. The lender is also exposed to the possibility of the home owner running up another $40,000 extra in debt on this home loan on weaker collateral. Lenders are now stepping in and freezing further access to these HELOC'S. The terms on these type of transactions are more like that of a revolving debt like a credit card than a home loan. Banks can change the terms on these loans just like they do credit cards. Even if you are not in a declining market, if you are planning on doing some home improvement, debt consolidation, or any other transaction that home equity lines are commonly used for, you may want to consider using those funds now. Although the recent fed fund's rate reductions do not have an effect on long term mortgage rates (I'll save that topic for another post), the reductions do impact home equity lines of credit. If your HELOC is tied in with the prime rate it will run 300 basis points (or 3%) above the fed funds rate. The current fed funds rate is 3%, so simple math tells us that prime is currently 6%. Although the fed is keeping a close watch on inflation, I think that with the strong effort to avoid a recession, we will likely see even more fed funds rate cuts. This means that if you borrow from a HELOC now you will probably be borrowing cheap money. Remember that this cheap money is not cheap if you don't have a game plan to get it paid off down the road (not a long way down that road either). These lines of credit are revolving interest not unlike credit cards. They can be quite costly if used improperly (like using your home as an ATM). However, if you had a home improvement project that you planned to use your HELOC to help with the financing and you have a strategy to pay it off down the road (like through a bonus, etc.), then go ahead with using the line now instead of letting the banks decide on your line of credit. HELOCS- Use them if you've got 'em or they may be gone.