HELOC - Here Today, Gone Tomorrow?

The news is filled with the possibility of the global economy grinding to a halt due to a lack of credit. But for many of us, this has already occurred. For years, American homeowners used their homes as credit cards, borrowing against the equity via a Home Equity Line of Credit (HELOC). These loans supported a wide variety of purchase such as medical expenses, college tuition, and vacations. But the spending spree is now over.

HELOC's are a line of credit based on the equity in your home. The lender assesses the value of your home, subtracts any existing loans, and if they feel there is sufficient equity, they offer a maximum loan amount. For example, if your home is valued at $100,000 and you have a $50,000 first mortgage, the remaining equity is $50,000. Based on this calculation, the lender may offer you a line of credit of up to $30,000. You do not borrow the money all at once. Rather, like a credit card, you use as much as you need, up to the $30,000 limit.

But as the economy weakens and housing values decline, HELOC's are becoming more rare. Many banks and savings and loans no longer offer these loans. And those who do, are requiring a larger amount of equity before they will consider allowing a HELOC.

For those of you who already have a HELOC, you may discover that your lender has frozen the loan and you can no longer access the funds. This means that even though you have not used up the full amount in your equity line, you could find that funds in the account are no longer available. Without prior notice, the bank could suspend the account if they find that the home's value has dropped so low as to not support the loan. And you could find yourself in the uncomfortable position of writing a check from your HELOC account only to have the check bounce.

If you have a HELOC and think you will need the funds in the near future, you may want to pull out the balance of your remaining credit line now, before the credit line is frozen. But do not make this decision lightly. In today's precarious financial times, HELOC's should only be used for absolute necessities. And they should never be used unless you are certain you will be able to pay the additional monthly costs.