Be familiar with your risk. Areas where home prices have fallen by 10% or more are major targets for freezes, says Susan McHan, president of Opes Advisors, a mortgage banking firm in Palo Alto, Calif. Because of new lending norms, your home-equity line of credit (HELOC) might also be in risk if you bought your home in the past few years with little money down. Be careful.
Last year consumers could without difficulty borrow up to 100% of a home's value through a combination of a HELOC and a first mortgage. Today you'd be lucky to obtain up to 90%; 60% is the max in areas hit hardest by home-price declines.
Lenders are starting to apply the same norms to existing HELOC clients. Call your bank and ask what the loan-to-value cap is on new HELOCs. If your home debt is above that, your line could be at risk. A change in credit score or a missed payment could also put your account at risk. Reread your contract to see if such factors permit the lender to cut you off.
Access your cash now. If your line of credit is in danger and you need the HELOC to finish a renovation, you could draw a lump sum. The drawback: you'll cut your equity; you'll owe interest now; and if home prices keep falling, your loan values could top your home's value. Therefore borrow only as much as you need and place the cash in a high-yielding savings account or CD until the renovation bills come due.
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