Frozen HELOC?

by Wade Barnes 22. August 2008

Given the current declining trend in the housing market, some lenders have chosen to not only exit the Home Equity Line of Credit (HELOC) business but also to freeze their existing customers' lines. What does this mean for me?

If you have a HELOC with a lender who has decided to freeze their current lines, some impacts are rather blatant while others may not be so obvious. The obvious part is once your line is frozen, you are unable to make further advances. This could place you in a huge bind if in fact you had plans to use your HELOC for future home projects, a wedding, school expenses, vacation, or the like.

What's not so obvious? Well behind the scenes, when a lender decides to freeze or close your HELOC one of two things can happen. First, if you have no outstanding balance, the creditor will likely report to the credit bureaus (Equifax, Experian, and TransUnion) that the loan was closed by the credit grantor. Although this was closed due to no adverse action on your behalf, this is not a desirable notation on your credit report. If you have an outstanding balance, the creditor will likely reduce your credit limit to match your outstanding balance, which looks as if you have maxed out your credit line. Having a maxed out credit limit is also undesirable.

Having accounts that were closed by the credit grantor as well as having credit limits that are maxed out both impact your credit score. So, not only are you unable to use your credit line for future uses, your credit is also being tarnished by the lender's decision to exit the market.

What's next? Well, you have options. Not all lenders are exiting the market; in fact many lenders are still actively seeking this business. It would be wise to find a lender who is interested in your business. Refinancing your credit line will allow you to not only have the line of credit for future purposes but will also lessen the negative impacts of your lender's decision.

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Home Equity Loan or Home Equity Line of Credit?

by Wade Barnes 21. July 2008

Home Equity Loan or Line of Credit

The time has come and you have decided to tap the equity in your home. In shopping products you study some differences betwwen Home Equity Loans and Lines of Credit but may still have some questions as to which product best fits your needs.

Every situation is different and it is hard to say that one product has more benefits than another in any given circumstance, but there are some questions you can ask yourself that may help guide you to your best fit.

Q: Does a variable rate bother me?
Most Home Equity Lines of Credit have a variable rate based on the Prime Rate Index, as posted in the Wall Street Journal, whereas most Home Equity Loans have a fixed rate throughout the term of the loan. If you pick a Home Equity Line of Credit, the rate from month to month may fluctuate. Most Home Equity Lines of Credit are also interest only, meaning it only bills for the interest owed during the draw term. In effect, if the Prime Rate goes from 4% to 8%, this means as the rate doubled, so did the monthly payment. Over a 10-year window, the prime rate tends to carry a lower rate than a fixed rate, but you must be wiling and able to withstand the peaks and valleys.

Q: Do I need the loan proceeds in one lump sum or over several installments?
If you need the funds in one lump sum, you can accomplish this with either product as the Home Equity Loan gives you all funds at once and the Home Equity Line of Credit allows you to draw as needed. If you need the proceeds over several installments (as common with home improvement projects, tuition expenses, etc...), it may be best to go with the Home Equity Line of Credit. With a Home Equity Line of Credit you only pay interest on money that you have already borrowed. If you don’t use it there are typically no interest charges. With a Home Equity Loan, typically finance charges begin to accrue the day the loan is established.

Q: Would a Home Equity Line of Credit tempt me to use the money more carelessly?
If you are taking out a Home Equity Loan or Line of Credit to payoff credit card debt, you may want to consider if lines of credit tempt you to spend carelessly. If so, you may want to go with a Home Equity Loan with an appropriate loan amount where payments are structured and there isn’t the ability to keep drawing. Keep in mind, you home is on the line and you don’t want to spend carelessly and risk not being able to make payments.

Q: How much can I afford?
Home Equity Loans typically bill both interest and principal every month whereas Home Equity Lines of Credit typically only bill interest during the draw period. This means by borrowing the same amounts with either product, a Home Equity Line of Credit monthly payment will be lower during the draw period. Keep in mind, the principal will be due at some point and provisions should be made to repay the loan. However, interest only payments may help accomplish a short-term goal.

In general, Home Equity Loans tend to be stable. The interest rate and monthly payment is stable making this an easy loan to plan for and budget. Overall, the Home Equity Line of Credit tends to be more flexible with a flexible interest rate, payment method, and ability to draw up to the credit limit when needed.

When shopping for Home Equity Loans or Lines of Credit, there is a lot to consider. The above questions are only a few basic points to consider. Again, every situation is different and lends itself to a whole new set of circumstances. 



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