Home Equity Freeze-Out…

Got a home equity line?  You’d better read this…

Many folks put the equity in their homes to work for them — whether money is needed for a remodel project, or just as an emergency cushion for a “rainy day,” borrowing against the equity in your home via a Home Equity Line of Credit (HELOC) has become very popular of late.   If you’re a homeowner in San Carlos, obtaining a HELOC has been a snap because home values have climbed unabated for years.

However, with the real estate market dropping out the bottom in some outlying regions, banks have been quietly freezing customer’s HELOCs if they deem the value of their home has dropped too far.   The banks, in their own compassionate manner, usually do this with no advance warning and will notify you via a letter that your HELOC has been frozen.  Period.   You don’t usually have to pay off the loan any quicker, but you cannot draw any more from the account — REGARDLESS of how much credit line you think you have left.

This really stinks if you’re in the middle of a remodel project and you were going to draw more funds out for the next stage.   But how does this apply to San Carlos?   After all, home prices keep climbing here (or are at least stable) so we should never see this happen here, right?

Wrong.

I have heard from several of my friends in San Carlos this week who were stunned to receive their own “freeze-your-credit-line” letter.   In San Carlos????   You bet, and here’s why.    The banks apply a simple loan-to-value ratio to determine how much they will loan you.  For example, one big, unnamed bank whose name rhymes with “Space” will loan up to 75% of the appraised value of your home, minus your first mortgage.  So if your home is appraised at $1M and you have a first mortgage of $600k, you (theoretically) can borrow $1M x 75% – $600,000….or $150,000.

The problem lies in the bank’s mysterious valuation figures.  In one example, the bank claimed a recently remodeled 3,2oo square foot home was only worth $1.1M. Huh?  That’s $345/square foot!!   There hasn’t been a home that has sold for that low in San Carlos for…..well, a long time.  Not even teardowns, let alone a nicely remodeled home.  Where they come up with these valuations is anyone’s guess.

So what happens if you get a letter like this?   First, don’t panic.  Call the number on the letter and pray that you can talk to a live person.  What you’ll hopefully hear is that the bank will re-instate the credit line if you can provide them with an appraisal that justifies the value that YOU believe it’s worth.  At the very least, they will want to see that it is equal the value that they set when they first loaned you the money.    The downside is that you must do this at your own expense, and appraisals run around $500.   However, this is a worthwhile investment if it thaws out thousands of dollars for you.   There may be other reasons that they have frozen your credit line, so it’s important to get an explanation before you jump to any conclusions.

So if you have a HELOC with any sort of balance and you haven’t received a letter yet, be forewarned.   If you have received a freeze letter and you need to get an appraisal done, I can put you in contact with a number of good appraisers — just contact me.  But nothing frozen, please…