While on vacation last week, I took advantage of being "unplugged" and read the Seattle Times. On the last Sunday of 2007, they featured an article on How You Can Ride Out a Recession by Teresa Dixon Murray. Teresa offers 17 easy suggestions on how to protect yourself during uncertain economic times with her top tip being:
1. If you own a house, get a home-equity line today.
It won’t cost you money unless you use the credit line. But this way, you will have access to money if you lose your job or hit an emergency. If you wait until you’ve been laid off to apply for the credit line, "good luck trying to get a loan if you’re unemployed," said Les Szarka, president of Szarka Financial Management in North Olmsted, Ohio.
I’m sometimes hesitant to broadly recommend HELOCs to clients. Actually, I feel this way about all mortgage programs, selecting a mortgage properly requires evaluating your current needs and future financial goals. HELOCs can be trouble when used improperly and a valuable tool when used with the right strategy (this is true for any mortgage).
One of the best reasons to have a home equity line of credit is for protection in the event of unexpected circumstances such as loss of employment or health. And as the article mentions, to provide a safety net during uncertain times with our economy. A HELOC is best used when you’re not using them (was that a Yogi-ism?) but you must obtain one while you’re employed, with good credit and home equity. If you lose your job or are temporarily off work due to health issues and/or your miss a payment due to being off work or ill, you will find it difficult to qualify for a home equity loan when you need it the most. Imagine being in need of cash, having decent equity in your home and having a lender tell you, "sorry you don’t qualify" or having to opt for a hard money loan.
There are a couple other reasons to consider a home equity loan today instead of tomorrow or next week:
Guidelines are tightening. Most home equity loans are limiting the loan to value they will lend on and are raising credit score requirements. Combine this with possibility of properties losing value and the amount of your possible credit line may be limited.
For example, if you home is valued at $400,000 today and you have a $300,000 mortgage currently against the property, your credit line may be limited to $60,000. If your home depreciates 5% to $380,000; your available credit line may be limited to $42,000. During these historic times, it’s also possible for the lender to reduce your credit line on the HELOC or to close it due to inactivity.
Review your options with your trusted Mortgage Professional (who will hopefully refer you to a bank or credit union if their rates are not competitive with this product…some are…some are not).