HELOC Wave

[NYExpat]

http://www.msn.com/en-us/money/personalfinance/the-dollar265-billion-wave-thats-about-to-crush-homeowners/ar-BBknFTE
The  lucky few who will be able to handle the payments... When will people realize that when you borrow money, you have to pay it back. No one forces them to take about a HELOC, but what, you forgot to budget for it?

[TheGrimSqueaker]

I would expect that, in time, there will be an initiative to add HELOCS to the kind of debt that can't be discharged with bankruptcy, kind of like student loans. The bank lobby is extremely powerful and has benefited well from the fact students remain on the hook no matter what. So they can easily afford to purchase that sort of legislated advantage again, and maybe even make it retroactive to cover loans that already exist.

[gimp]

HELOCs make no sense to be bankrupt-proof as they are backed by collateral. Admittedly not very good collateral, but it is up to lenders to create risk models and price the loans accordingly.

I think HELOCs are a great tool - in the right hands and in the right circumstances. Like any tool, they have the potential to be abused by idiots and backfire. Also, "second mortgage" is in my opinion a better term since it conveys the gravity of the loan...

As a non-home-owner, though, I wonder if there is a set of "guidelines" for the right reasons to use a HELOC.

[RFAAOATB]

HELOCs make no sense to be bankrupt-proof as they are backed by collateral. Admittedly not very good collateral, but it is up to lenders to create risk models and price the loans accordingly.

I think HELOCs are a great tool - in the right hands and in the right circumstances. Like any tool, they have the potential to be abused by idiots and backfire. Also, "second mortgage" is in my opinion a better term since it conveys the gravity of the loan...

As a non-home-owner, though, I wonder if there is a set of "guidelines" for the right reasons to use a HELOC.

That's something I don't understand as well.  When does a HELOC make sense?  Some advertisements recommend using it to consolidate debt into one low interest item, others suggest buying jet skis or vacations with it.   What about surprise giant medical bills?  Is a HELOC better than using credit cards but worse than raiding retirement accounts?

[regulator]

I guess it depends on the borrower's self control.  Unlike a credit card, HELOCs usually allow you to have an interest-only payment.  That means you can get a far larger amount of debt for a given monthly payment compared too a credit card.  People who have little self control can get in very deep very quickly.  So there is probably never a good use for a HELOC for those folks.

I usually have a HELOC set up, but I have drawn on one exactly twice in a decade of having one.  Once during the crash to go buy investments, and once when moving across country and extracting enough equity from house 1 to buy house 2 (house 1 was later sold and the HELOC repaid).  Basically if I have to draw on the HELOC it is either extremely extenuating circumstances or I screwed up big time.

[arebelspy]

Many of them will have already gone bad during the housing crisis.

I don't anticipate this to actually have a significant impact any more than the ARM resets of 2011, foreclosure wave of 2012, or of 2013 or ... etc. etc.

It's media fear mongering and clickbait headlines.  Ignore it.

[TheGrimSqueaker]

HELOCs make no sense to be bankrupt-proof as they are backed by collateral. Admittedly not very good collateral, but it is up to lenders to create risk models and price the loans accordingly.

Nothing about consumer debt related laws necessarily has to make sense. All they have to do is to benefit the banks lobbying for it.  For example, it doesn't make sense to make student loans bankruptcy-proof but not medical loans, which are equally collateral free.

Logic and government seldom mix.

[Tabaxus]

HELOCs make no sense to be bankrupt-proof as they are backed by collateral. Admittedly not very good collateral, but it is up to lenders to create risk models and price the loans accordingly.

Nothing about consumer debt related laws necessarily has to make sense. All they have to do is to benefit the banks lobbying for it. For example, it doesn't make sense to make student loans bankruptcy-proof but not medical loans, which are equally collateral free.

Logic and government seldom mix.

Eh.  Standards on student loan debt are probably too strict, but there does need to be something to prevent the obvious move of go to school, get eyeballs in debt, graduate, immediately file for bankruptcy.  Bad faith filing and so on could probably fill the niche, but even then, better to have reasonably consistent standards that can be applied across jurisdictions.

[purplish]

HELOCs make no sense to be bankrupt-proof as they are backed by collateral. Admittedly not very good collateral, but it is up to lenders to create risk models and price the loans accordingly.

I think HELOCs are a great tool - in the right hands and in the right circumstances. Like any tool, they have the potential to be abused by idiots and backfire. Also, "second mortgage" is in my opinion a better term since it conveys the gravity of the loan...

As a non-home-owner, though, I wonder if there is a set of "guidelines" for the right reasons to use a HELOC.

That's something I don't understand as well.  When does a HELOC make sense?  Some advertisements recommend using it to consolidate debt into one low interest item, others suggest buying jet skis or vacations with it.   What about surprise giant medical bills?  Is a HELOC better than using credit cards but worse than raiding retirement accounts?

For me I used a HELOC to purchase a 2nd property, so essentially I'm using it as a mini mortgage. They're very  helpful if you're going the rental route.  I also used it to pay off some credit card debt(I know i know, my only time) from being laid off, MUCH lower interest rate.

[nobodyspecial]

When does a HELOC make sense? 

You have a $$$ in equity in your house but no savings, your house is now worth $$ more than the mortgage and when you sell it you are going to get $$$$$ more than what you paid - so why not get some of that "profit" now ?


and then 2008 happened ......

[Midwest]

HELOCs make no sense to be bankrupt-proof as they are backed by collateral. Admittedly not very good collateral, but it is up to lenders to create risk models and price the loans accordingly.

I think HELOCs are a great tool - in the right hands and in the right circumstances. Like any tool, they have the potential to be abused by idiots and backfire. Also, "second mortgage" is in my opinion a better term since it conveys the gravity of the loan...

As a non-home-owner, though, I wonder if there is a set of "guidelines" for the right reasons to use a HELOC.

That's something I don't understand as well.  When does a HELOC make sense?  Some advertisements recommend using it to consolidate debt into one low interest item, others suggest buying jet skis or vacations with it.   What about surprise giant medical bills?  Is a HELOC better than using credit cards but worse than raiding retirement accounts?

Heloc's make a lot of sense when you have self control.  For instance, we have a largely paid off residence with a Heloc.  If we need the liquidity, we can tap it any time.  No interest on the unused amount but full use of 80% of the equity of we need it.  I'm financing 2 real estate investments with it this week.  As soon as the projects are complete, HELOC is repaid and no more interest.  Used responsibly, they are a great tool.

On the other hand, many people are incapable of using them responsibly just like any other credit source.

[Beaker]

That's something I don't understand as well.  When does a HELOC make sense?  Some advertisements recommend using it to consolidate debt into one low interest item, others suggest buying jet skis or vacations with it.   What about surprise giant medical bills?  Is a HELOC better than using credit cards but worse than raiding retirement accounts?

There's an MMM post from a while back about keeping a HELOC instead of an emergency fund, so that you don't have cash sitting around being useless.

Ah yes, here it is, the Springy Debt post.

[forummm]

Do HELOCs cost something to initiate or when you aren't borrowing money?

[nobodyspecial]

Do HELOCs cost something to initiate or when you aren't borrowing money?

My bank created one for free when we got the mortgage.

[Hunny156]

Our first one was during a company paid relocation, so if there was a fee, the employer picked up the tab.  We used it to pay off our school loans, b/c the interest was cheaper and we were making too much money to get the tax write off.  I was terrified as I was mailing those checks!

We paid it off ASAP, and then got a better deal at another bank for a new HELOC, no fees, higher limit.  We used this for leverage when buying rental homes, so we could pick up a good deal before hubby's bonus check would come in, stuff like that.

Shortly after the new HELOC closed, I checked our credit reports and noticed that the original holder of the HELOC had neglected to close the account!  In theory, we could have borrowed something like 125% the value of our home if we had maxed out both HELOCs.  Crazy times...

[martin]

original holder of the HELOC had neglected to close the account!  In theory, we could have borrowed something like 125% the value of our home

They didn't neglect, they make it really difficult to close a HELOC - after all you might need the money any day for a new speedboat.
Ours even appeared as option at the ATM so you could borrow $20 for drinks after work.

The 125% isn't a problem because your house is going to be worth $$$$$ as the market rises so why should you worry .....

[Hunny156]

original holder of the HELOC had neglected to close the account!  In theory, we could have borrowed something like 125% the value of our home

They didn't neglect, they make it really difficult to close a HELOC - after all you might need the money any day for a new speedboat.
Ours even appeared as option at the ATM so you could borrow $20 for drinks after work.

The 125% isn't a problem because your house is going to be worth $$$$$ as the market rises so why should you worry .....

I guess the banks didn't care about each others interest back then.  The new bank closing paperwork specifically had a form stating that all other HELOC's were to be closed, and if memory serves, they contacted the former bank and received paperwork from them, confirming the old account had a $0 balance and was closed.

As for the market, that particular house we purchased for $250K.  At the peak of the market, it was $325K.  I attempted to sell in 2009, and seriously pissed off my neighbors by listing it at a realistic price of $275K.  They were all still dreaming that the rise would level out at $500K.

I managed to put the house under contract three times, only to have the deal fall through each time.  I pulled it off the market and rented it instead in under a week.  Six years later, the market in that area is starting to move again.  It's worth about $195K today.  Maybe in another decade it will be worth what I paid for it in 2003!

[Embok]

HELOCs can be good tools, so long as you understand you have to pay them back.  I've used one twice. 

The first time, we used one to help buy our first house in a rapidly appreciating market, and repaid the HELOC over a 3 year period. 

We just took a new one out this year, as we are preparing to radically downsize our house in the wake of changes to our family, but it needs some significant work beyond our DIY abilities to be market ready. 

Taking out the HELOC is allowing me to have that work done much more quickly, which I hope will let me put the house on the market by this July, rather than next year if we paid for the work out of ordinary cash flow.   

Since moving should cut our housing, property tax, property insurance and utilities in half, speeding up that process is definitely worth the cost in interest for the HELOC.