Had an interesting conversation over the weekend with a friend, Ron Blaylock, about the next lending crisis we’re likely to face, and he said to watch the home equity line of credit (or HELOC) market. Just as mortgages were ‘securitized’ and sold off to investors, so were home equity loans. It stands to reason, he says, that if people are losing their homes, or having trouble paying their mortgage – which, after all, is the primary loan on their home – that secondary loans like HELOCs could be the next domino.
Ron is a heavy hitter in investment banking, so I have no doubt he knows what he’s talking about. We talked about this Saturday night, then – voila – there was a piece about it in today’s Christian Science Monitor.
In an article titled, "Has the Credit Crunch Hit Your Home Equity Line?," the Monitor says that "(home equity) loans are now in the bull’s-eye of regulators’ concerns regarding lax underwriting standards by banks and are emerging as the next piece of fallout from rapidly declining home prices."
The Monitor reports that borrowers already are finding it harder to get these loans or are finding their credit lines frozen, primarily because banks are concerned that the value of the real estate they’re written on is declining. That means lots of people planning to use cheaper home equity rates to pay for home renovations or cars, and for parents planning to tap their home’s equity to pay college tuition, may have to look for other sources of funding. Which is a shame because private student loans usually have higher interest rates – and most other types of loans are not tax deductible.
Full disclosure: I have a HELOC that I used to renovate my house. It’s at 5.25% right now, but has been as high as 8%, give or take a fraction. That was ugly. When the Fed lowers rates, it drops. And you know the converse.
My friend Carole in St Louis had one – a mortgage broker talked her and her late husband into rolling their entire mortgage into a HELOC. Uh-oh. At nearly 8% that wasn’t pretty. It was some complicated system where you deposit most of your paycheck into the credit line, then pay your bills from that, and whatever’s leftover at the end of the month goes toward your principal. "If you’re savvy you can make it work," Carole says. "It encourages you to put more toward principal than you ordinarily would, but you could get into a lot of trouble if you’re not disciplined." Well, Carole is anything but undisciplined, so after we talked about it last autumn (my end of the conversation was mostly confined to, "Huh? How does that work?"), Carole looked closely at the numbers and decided to switch back to that trusty old standby, the 30-year fixed mortgage — at 5.5%. You feelin’ lucky? ‘Cause floating rates are a gamble.
The Monitor says there’s $1.1 TRILLION outstanding in the HELOC market this year. That’s a lot of money with a question mark behind it. So as much as we’d like to hope we’re moving beyond the mortgage meltdown, like the floods in the Midwest, this river may just keep on cresting.
So… what’s been your experience with home equity loans? Have a HELOC? Considering one? Why, and what would you use the money for? Advantages? Disadvantages????