HELOC Freezes Spreading

Be advised that most banks and lenders nationwide have begun freezing Home Equity Line of Credit 2nd mortgages. Even borrowers with significant equity and perfect credit have been receiving HELOC freeze letters. In many cases, it’s not about borrower creditworthiness but rather the institutions shoring up their balance sheets. The reserve requirements banks need for open lines of credit are significant, and with mass losses reported by nearly all major financial institutions over the past 2 quarters, the strategy to freeze HELOCs is a quick way for them to gain some footing.

If borrowers used a HELOC 2nd mortgage for the purchase of a home and don’t use it for draws, the worst case is that it might be frozen for future draws. But the rate and duration terms of their note cannot be changed.

If borrowers have open lines of credit they were planning to access during 2008, they should strongly consider taking a draw now, before an unforeseen limitation on their ability to access their equity. The Prime Rate is the benchmark rate for HELOCs and is currently 6%. HELOCs are priced at Prime plus/minus a base rate. The current average HELOC rate for a good credit borrower with some equity is about 6.5%. In most cases, interest on HELOC amounts up to $100,000 is tax deductible. If a borrower is in a 33% tax bracket, the after tax rate on this money is about 4.355%. So if they took a HELOC draw and placed it into a CD or another similar liquid vehicle earning approximately 4.5% (or 3.015% after tax), they can ease the cost of those funds on an after tax basis. Obviously they’d still have to pay the monthly payment (for example, $50k at 6.5% is $271/mo), but if liquidity or a cash safety net is their priority, it’s worth considering a draw now.