Many of us use obtain an equity line of credit to have as an emergency fund.  Why tie up cash if you can write yourself a check when you need it.  Isn't this one of the ways the banks market the equity line?

Yesterday I received a panic call from a past client that had obtained the line of credit in November 2006 when his home appraised for $675,000.  His equity line bank reviewed his file, ran an AVM to determine a current value that was 19% lower.  This dropped the loan to value below what was necessary to qualify for the equity loan so the bank notified them that the line of credit was being cancelled.

These clients have excellent credit scores (750) and low ratios.  They also live on the northwest side of Chicago, in an area where no two homes look alike - hardly an area that an automated appraisal system is designed for.

While the wording in the equity line disclosure indicates that the bank may "suspend additional extensions of credit" (allow you to write checks against the available line) or "reduce your credit limit" (which will show as usage in excess of authorized limit on your credit report - significantly reducing your FICO score)if the value of your home drops significantly, this action could have a significant impact on their credit and financial health until the issue is resolved. 

The notice that my client received allows them to pay $200 for a new appraisal from an appraiser approved by the bank (sounds fair to me??? NOT!) and if the value comes in higher they will refund the $200 and re-acctivate the credit line.   When asked what would happen if they took their business elsewhere, they were told that this option would trigger an early cancellation fee of $300+. 

So what do you think the customer service tag line should be changed to - "take it of leave it", "too bad", "deal with it", "not my problem", "wait until the appraisal comes in and we will see".  Respond with your vote.

I don't know about you but I use my line of credit as an emergency fund and keep the balance as low as possible by depositing all of my available cash.  Had I received that letter, I may have just deposited my payroll check with the expectation of paying my mortgage payment with an equity line check.  Has anyone looked at the "Mortgage Accelerator" program?  Guess what would have happened if the mortgage payment bounced!

For all of you that use an equity line of credit, look at your closing papers - disclosure of terms and beware.  Don't use your last $$$$ of liquidity to pay down your line because it may not be available to you tomorrow!  This morning I stopped at the bank and moved my available funds from my equity line to my checking account.  If I have to pay some net interest, it is better than letting someone come during the night an mess up my financial flexibility.  Have a great day!