Warning: Your home equity line of credit may evaporate in an emergency
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I’m a Seinfeld fan, and I’m reminded of the episode when George Costanza pushed an elderly woman, a clown and a room full of children out of his way so he could escape what he thought was a blazing fire. The clown ended up dousing the blaze with his big shoe. When you think of your home equity line of credit, you should be reminded of George. In an emergency, your home equity line of credit may be the first thing to leave the room.
A few weeks ago, the Wall Street Journal published an article about home equity lines of credit. The article described how some financial institutions were reducing the available credit on home equity lines for borrowers who were having financial trouble. My first reaction was to assure myself that such a fate would never befall me. I pay my mortgage and home equity line of credit on time each month. In fact, I’ve never had a late payment in the four years since I bought my current home, and I even pay the bills automatically from my checking account each month. But then I started to wonder what would happen if I lost my job and started paying some bills late. Would my mortgage company take away my available line of credit?
So I dug through my old files and pulled out my mortgage documents. On page 3 at the bottom of my home equity line of credit agreement, under a heading labeled “Possible Actions,” I found this eye-opener:
We may refuse to make additional extensions of credit or reduce your credit limit if:
- The value of the dwelling securing the line declines significantly below its appraised value for purposes of the line.
- We reasonably believe that you will not be able to meet the repayment requirements of the line due to a material change in your financial circumstances.
So if housing prices decline significantly, my mortgage company (which is a large, well known financial institution) can reduce my credit limit. And if I lose my job, the mortgage company may also be able to reduce my credit limit. In other words, if I hit on hard financial times, just like George, my home equity line of credit may be the first one out the door.
Now I don’t lie awake at night worrying about this, and I’m not suggesting you do, either. But as housing prices continue to fall and inflation moves higher, it’s worth spending some time evaluating just how you would handle a real financial crisis. How much do you rely on your home equity line of credit as an emergency fund? Do you know how much money you need each month to handle the necessities? And if you’re interested in my approach to an emergency fund, check out The Doomsday Fund: How Planning for the Worst Prepares You for the Best.
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11 Comments, Comment or Ping
Hustle Strategy
I have had this happen to me once. I had a line of credit on a house. I used it regularly for various things. No late payments or anything of that ever… I had the same steady job, same income, same everything. I go to get some money out of the equity line and I get denied “talk to loan adviser,” message via the web.
My debt to credit availability had changed dramatically over the previous year. I had a credit card give me a larger limit. This raised a flag in their automatic processing and made me lose the ability to use my equity line.
The robot that I initially talked to about this said it was policy and that is how it was. Once I finally talked to someone with a brain, they were able to quickly see that I should not of had this happen. The situation was resolved. I do not lose sleep or stress this happening again. These banks have lots of “outs” and can do many things with our accounts, I am just glad they didn’t raise the rates…
Apr 23rd, 2008
Mrs. Micah
It makes sense, since a HELOC is essentially the bank giving you a mortgage again. While it feels like you put your money in and should be able to get it back, the bank owes no one equity. It could be handy to have one, I imagine, but it’s not as secure as cash in hand.
Hope you don’t need yours for any emergencies.
Apr 23rd, 2008
DR
I confess I do rely on my home equity line of credit for short term cash needs. I could always liquidate some investments, but the tax consequences would really sting.
Apr 23rd, 2008
Eric
Zoinks! I better track down my credit line docs and see what hidden surprises there are. I just got done worrying about the LIBOR rates….
Apr 24th, 2008
Mr Credit Card
HELOC is not the only means to get access to emergency funds.
Your unused credit card lines and limits is also a source of emergency funds.
Having a Loan Margin Account with your portfolio in your brokerage is another source of liquidity.
Taking a loan against your insurance policy is another possibility.
Apr 25th, 2008
Scott
I had Bank of America do the exact opposite a few weeks ago. They wanted to increase my HELOC. It is not in the interest of bank’s and financial institutions to lower your HELOC or remove access to it. Banks want us to borrow more so they can earn more etc and repeat this cycle. My house value has fallen 300k in value from the high in 2006 and my bank want’s to increase my HELOC. Funny!
Apr 25th, 2008
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