Smart Borrower Blog

Is A Home Equity Loan Right For You?

Jun 6th, 2009 @ 4:29 PM by Alden Smith

A big factor in the current mortgage crisis is the way real estate was valued.   Values of homes went up and up and unsuspecting consumers were like kids in a candy shop.   Want a new SUV?   Dreaming of a luxury vacation?   Then take out a home equity loan and have yourself a good time.   This worked fine until the housing bubble broke.   All of a sudden, homeowners found themselves with a mortgage underwater, and with unemployment at a 26 year high, often found themselves out of a job.

Banks and credit card companies are feeling the pinch just like everyone else.   Lines of credit have been frozen and banks are struggling to protect their assets.   One of their strategies is to limit credit lines for homeowners.

More and more banks are looking at home equity loans as more of a risk than a first mortgage.   This is because the first mortgage always has to be satisfied first.   If a homeowner walks away in the house goes into foreclosure, the first mortgage gets paid off and then the second mortgage will be satisfied if there is anything left.   Chances are very good that even the first mortgage will not be covered.   This leaves banks in a very poor position.   It is little wonder that banks are hesitant on making home equity loans on any property.

Banks have their own way of determining whether or not the value of a home has declined significantly.   There is rumor of an automated valuation method that is used to determine if homes in a certain area no longer has sufficient equity.   According to an article on CBS News.com, banks will also look at home values in typical geographical areas to see if there has been a significant decline over two quarters.   If that is the case, loan-to-value limits can be significantly lower.

Having equity in your home is like putting money in the bank.   If you are facing tough financial times, and have a decent equity built up in your home, you may be considering a home-equity loan to get you by.   If this is the case, and you are faced with a freeze in your area, CBS News offers you tips on what you can do.

CBS news advises the to read the credit line agreement to determine if there are any provisions that could stop you from attaining a home equity credit line. Banks are extra cautious these days, and if they believe there is a change in your financial situation they can freeze or suspend your credit line.   Make extra sure to comply with any requirement if you change jobs or if there is a change in your financial situation.

If you think you are or a victim of the automated valuation method, challenge the AVM if you think that the value of the home the lender is using to determine the AVM is wrong.   Part of this process would be chaining an appraisal from a firm that the lender would agree to.

If you have a current home equity line of credit revoked, and you have paid fees for the credit line, ask for a refund.

Because current rates are relatively low, consider refinancing through a fixed rate mortgage on both the first and second mortgage.   CBS News reports that with the current mortgage relief program currently in place, more people may qualify for a complete refinancing of first and second loans.