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Freezing Your Own HELOC May Not Be As Crazy As It Sounds

[Jun 3, 2009.]


Just a short year ago, it seemed like mortgage lenders were taking every opportunity to limit their exposure and freeze any existing home equity line of credit (HELOC) they could. Many homeowners soon found themselves with home improvements, business needs, and medical bills short of funds because of their frozen HELOCs. Fast forward to our current economy, and the once crazy thought of freezing your own HELOC may now make perfect sense.

The Battle Against Declining Home Equity
More so than ever, homeowners around the nation have become the victims of increasing foreclosures and short sale activity. Seeming to spread as fast as wildfire, some homeowners can easily found themselves bleeding anywhere from ten to thirty percent of their home's equity. And just a short year ago, home equity lenders realized this and began inspecting their existing home loans.

While lenders are still reviewing neighborhood home equity values, some homeowners may actually need to take the proactive response of cutting themselves off their home equity loan. Especially in the case of HELOCs, an existing home equity loan can easily reflect an inaccurate amount of available equity leftover. So while homeowners may consider themselves lucky for escaping these frozen credit lines, the cuts may be more necessary than they think.

Typically, mortgage professionals advise homeowners have a loan to value ratio under 80% (20% equity). If you've accessed your home's equity in the past few years, lenient lending guidelines could have easily put you over this mark. And if your home has recently suffered a decline in value, this too would contribute to your depleting home equity. Combine all these factors together and it is almost no wonder home equity lenders are as scared as they should be. Freezing your own home equity line can be as easy as limiting your own access, but it can sure save you from more serious equity troubles in the future.

But Don't I Already Own My Home's Equity?
The surprising answer is no--you actually don't own it yet. Unless you sell your home, convert to a reverse mortgage, or a home equity conversion mortgage (HECM), you technically don't have free access to your home's equity. While an appraisal might show you have $150,000 leftover in equity, you'll still have to pay back that $150,000 through monthly mortgage payments if accessed.

This realization is important because many homeowners incorrectly think that they can rely on their home's equity during tough times. In the case of our current job market, high unemployment rates have become a serious concern for the already struggling housing market. In fact, CNBC recently wrote an article predicting another wave of foreclosures among prime borrowers because of struggling employment numbers. As a result, both prime and "subprime" borrowers need to be especially careful with their home's equity more than ever before.

Since each homeowner's situation is unique, borrowers looking for a new home equity loan should seek the help of a home equity loan specialist for more specific details. Considering the times, a mortgage professional can help you weigh the advantages and disadvantages of a home equity loan according to your individual situation.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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