Millions of people have home equity lines of credit (HELOC) in the United States today. In 2001, an estimated 7.7 million people had a HELOC, and that number has continued to skyrocket. HELOC's are used for myriad purposes, from paying college tuition to just keeping people afloat. So what would happen if a lender decided to freeze an owner's HELOC?
A HELOC can provide a homeowner with a substantial amount of money to finance their expenses. It is used much like a credit card, providing cash when you need to make purchases. The loan is secured with the equity in your home, meaning that you are staking your house as collateral if you cannot repay your debt.
It isn't a pretty thought. The money you were using to pay for auto financing or home improvements, or perhaps even just to survive, is suddenly no longer available to you ever again. Perhaps you made one late payment, but the bank has decided to cut you off altogether. Lenders do have that option. Often, after 30 days without payment, that is exactly what happens. You need to check the fine print in your loan agreement and know your lender's policies to ensure this never happens to you.
Now, imagine if your lender announced one day, totally out of the blue, that they were going to reduce the limit on your HELOC. Actually, they were going to reduce their limits on all of their HELOC's across the board, and yours was no exception. What would you do?
This situation is not unimaginable. Rumors are already spreading about the intentions of financial institutions in Southern California. Due to deteriorating market conditions, spiraling home values and uncertainties in the government's securities division, it is very possible that lenders will put the freeze on some or all of their HELOC's, depending on how much worse the circumstances get.
Experts agree that it is wise to diversify a bit so that you and your family have options. For the short term, try to open a couple other lines of credit, like credit cards, to ensure that you and your family will stay afloat.
As far as the long term is concerned, it certainly isn't wise in this economy to bank on the availability of a large home equity line of credit as the foundation for the family finances. Perhaps you need to downsize spending or even look into a home with a lower monthly mortgage payment. Remember, it's much better to sell your home and be able to pay your monthly mortgage bill than it is to face foreclosure. Being stubborn about staying in a house you can't afford will only hurt your finances in the future.
If you are currently in a HELOC, ensure you are paying your debt down and making your payments on time, every time. The home equity lines of credit that are at the highest levels of risk will likely be the first ones frozen. Don't be afraid to consult a professional if you need help with your HELOC or mortgage. A simple phone call will save you from lots of financial worries in the future.
