I have heard a lot of frenzied comments and illogical notions regarding home equity lines of credit in the last two weeks. The news media have been reporting, correctly, that many banks are beginning to freeze equity lines and not allow people to take out any more credit. Along with that, many are suggesting that you should take out everything you can get in your credit line before they freeze yours too. Please, think before acting when it comes to this decision!
Over the past few months, because of the credit crunch, some homeowners have been receiving letters from their banks indicating that their home equity lines of credit are frozen – meaning they cannot get any more money. The letter may say that it is because of declining values of homes in the area, or for many other reasons. Sometimes it may be for no reason at all, other than the bank wanting to decrease its exposure to the current markets. Don’t be offended or let pride get the best of you! This may not be a terrible thing. Case in Point:
I was at a meeting of local business owners this week. As we were discussing various things one of them said that he had received such a letter. The bank told him that his home (which he then described in detail and said had been appraised three years ago at $1,000,000) was now only worth $450,000 and so they were not able to extend him any additional credit and had frozen his equity line. He was upset and paid $400 to an appraiser to prove to the bank that his home was worth much more. The appraiser said that it was worth $625,000. Did the bank budge? No. And now he is $400 poorer.
Don’t Rush to “Get Your Money While You Can”
First, remember that this isn’t your money that they are freezing. They just aren’t giving you any more of their money. I have read articles in some very respectable publications urging people to take out the remainder of their credit line in a lump sum so that they have it when they need it. To me this is ludicrous. Yes, there are potential tax advantages to this kind of loan. Yes, the interest rates on these loans are often lower than many credit cards. But you are still paying interest. And, by definition, any tax benefits will only be a percentage of that interest that you pay. The real question is, do you really need the money?
If you are in real need of a loan and the best way for you to get it is through your equity line, then you may want to take some out now while it is still available. But please don’t increase your debt “just in case.” Would you spend $10,000 on your credit card just to have an extra $10k in your savings account? I hope not. In many ways, jumping on this frenzied equity-line-band-wagon is just the same.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.