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Old 02-14-2008, 10:00 PM   #21
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Thanks for the great info. Several people mentioned that the "most likely" reason for my bank to freeze a HELOC would be if the house value dropped and the credit line put me near or over the reduced house value. I don't think I have to worry about that as house value is way above HELOC limits, but I am worried about other scenarios, such as bank is generally tightening these kinds of agreements, emergency includes loss of job and bank uses that as reason to freeze account, other reasons besides creditworthyness that might shut off credit line just when it's needed. Any sense of how real any of these dangers are? Scare stories in financial press about credit tightening have got me concerned, but I'm having difficulty determining if any of it applies to my situation or not.
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Old 02-14-2008, 11:14 PM   #22
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Yeah, and you oughta see the letter I wrote them about their hopelessly myopic perspective on the matter, and the areas where they royally screwed up or didnt give enough information.

They wrote me back, and one of their editors is going to be talking to me next week about a revision to the article with more information and some different conclusions...
Well, good on ya. I felt it was a little shallow but was unsure why. Did you address your letter to the Editor? -- they may print it. In any event, I will be waiting on their response.

Disclosure: I have a HELOC and have used it often for just such purposes. It is my only mortgage and currently has a zero balance. Nevertheless, I would use it in a heartbeat if I thought it useful. It is a source of funds with relatively low cost and certainly convenient. Risk, of course, is determined on a case by case basis.
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Old 02-15-2008, 03:11 AM   #23
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helocs can be a real problem for emergency source of funds. im still trying to figure out how most people can afford to pay a loan back at the same time they are in a cash crunch. i think there are very few situations for most where counting on the heloc as the same has having had your own real cash will be a better idea... the only people who should do this are those that have the money and dont really need the loan but do so out of convience more than necessity. if you have lots of assets and can liquidate them in a heartbeat to pay the loan back then i can see it
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Old 02-15-2008, 04:29 AM   #24
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A HELOC is not an emergency fund. Every HELOC I've had (two) had a clause right there in it that said the bank could decline to advance you any money whenever they wanted to.Better not count on taking a draw and depositing the money into another account at the same bank, either. There was also a clause giving them the right to offset---take money from another of your accounts and apply as a payment to the HELOC.

Im my situation a HELOC is more of an investment tool,than an emergency fund.I invest in real estate and the bulk of my properties are free and clear and cashflow nicely.Quite frankly I hate debt,but without the leveraging power of money,I'd still be a wage slave.
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Old 02-15-2008, 08:25 AM   #25
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helocs can be a real problem for emergency source of funds. im still trying to figure out how most people can afford to pay a loan back at the same time they are in a cash crunch. i think there are very few situations for most where counting on the heloc as the same has having had your own real cash will be a better idea... the only people who should do this are those that have the money and dont really need the loan but do so out of convience more than necessity. if you have lots of assets and can liquidate them in a heartbeat to pay the loan back then i can see it
The problem with your own funds as "emergency cash" is: where do you put it? No matter how you look at it, this money would be lying fallow somewhere and, after all, you may never need it. I believe this has to do with something called "opportunity" cost.

In any event, "emergencies" take many forms not all of which shut off income (cash flow) forever -- including that worst of all emergency, a HD TV on sale. Most HELOCS allow you to determine your own repayment schedule (after, of course, some very minimal amount). This allows one time to recover from any emergency without it turning it into a Disaster. As "LiveItUp" just said, without leverage we would all be digging ditches... until we died.

Having said all that, it is good to keep in mind that you are placing your home at risk with a HELOC and act accordingly. "Never forget the Dragon when you live near one."
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Old 02-15-2008, 08:35 AM   #26
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Yeah, and you oughta see the letter I wrote them about their hopelessly myopic perspective on the matter, and the areas where they royally screwed up or didnt give enough information.

They wrote me back, and one of their editors is going to be talking to me next week about a revision to the article with more information and some different conclusions...

Besides not talking at all about risk adjustment to the various approaches, the article is pitched towards a wage earner, not a retiree. It was the classic error of reducing the situation to the most simplistic "I can make xx% over here over 30 years and it only costs me yy% to fund that arbitrage". Thats fine if thats as complex a situation as you feel comfortable with looking at and if you make all your financial decisions in close set binary and if you can watch your investments bounce around like a rubber ball while your house is on the line without making any changes to your AA.

Wage earners with a 10+ year horizon before retiring oughta have a mortgage and invest as much as they can. Retirees...a lot harder to make the case.
Thanks CFB! DH showed me that article. I read it sad said that CR needs to stick with evaluating toasters. I didn't have the time, inclination, energy or whatever to respond. But it certainly wasn't useful.
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Old 02-15-2008, 08:59 AM   #27
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Countrywide just canceled any draws on our HELOC based on declining home values.
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Old 02-15-2008, 09:00 AM   #28
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Mick, where is the property? What was the CLTV?
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Old 02-15-2008, 10:32 AM   #29
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I think the key word here is "emergency" money.

I dont plan on tapping the heloc or reverse mortgaging my house, but under certain circumstances its an option.

Given a situation where someone might have 3-4 months worth of expenses...or 2-3 years worth if they have a lot of leverage by investing their mortgage and need to protect themselves from protracted downturns in the market. Unless cleverly invested (with a degree of luck) at good rates in longer term cd's, most peoples cash is losing ground to inflation.

For something they might probably never use.

I'd rather let the bank be my lender of last resort at a reasonable rate for something I have a <5% chance of using, than lose value on my money every month with 100% certainty.

If and when I hit a situation where I'm faced with "okay, checking account is empty, markets are down so I dont want to sell any investments right now, I have some bills to pay", I can either sell something, get a temporary PT job, use the heloc, use my overdraft/line-of-credit, use a credit card, or any one of another dozen options.
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Old 02-15-2008, 10:57 AM   #30
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If and when I hit a situation where I'm faced with "okay, checking account is empty, markets are down so I dont want to sell any investments right now, I have some bills to pay", I can either sell something, get a temporary PT job, use the heloc, use my overdraft/line-of-credit, use a credit card, or any one of another dozen options.
Exactly!

However, in that particular circumstance, a HELOC is a little hard to use unless it is already set up. Therefore, a little advance planning is necessary -- like having it already in place -- since any mortgage requires tons of paperwork, inspections, and other such time consuming activities.
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Old 02-15-2008, 11:22 AM   #31
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Mick, where is the property? What was the CLTV?

Colorado

LTV, if I remember right was 90% when we got the HELOC.
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Old 02-15-2008, 12:36 PM   #32
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Exactly!

However, in that particular circumstance, a HELOC is a little hard to use unless it is already set up. Therefore, a little advance planning is necessary -- like having it already in place -- since any mortgage requires tons of paperwork, inspections, and other such time consuming activities.
I set up a HELOC with PENFED in 8 days, no cost, no inspections, no appraisal, nothing sent in on my part, completion of the on-line application and then only had to take the overnight package they sent to my local notary and put the signed paper work into the SASE and send it back to PENFED. 4 days later had on-line access to $100K when and if needed.
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Old 02-15-2008, 12:36 PM   #33
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Exactly!

However, in that particular circumstance, a HELOC is a little hard to use unless it is already set up. Therefore, a little advance planning is necessary -- like having it already in place -- since any mortgage requires tons of paperwork, inspections, and other such time consuming activities.
I usually get one set up as soon as I'm in a new property. FWIW, there was very little paperwork or other stuff to do with the three I've executed. One had an appraiser do a "drive by" appraisal, which I think means they just see if theres a house there and it appears to be in good condition. The other two didnt even do that. All three sent a notary over to my house with the paperwork, which took about 45 minutes to read and sign.

That was it. I received a checkbook in the mail to use a few weeks later, and I could transfer amounts from my HELOC to any other account online.
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Old 02-15-2008, 01:14 PM   #34
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This was a really germane post for us -- we're about to refinance our mortgage and then take out a HELOC to pay off a private debt. In the process of refinancing, we are using our emergency fund to pay down the mortgage even more (this frees up a lot of cash and will allow us to keep this place as a rental when we move). But it means we'll be operating without an EF for a few months, and we're planning on using the HELOC as an emergency fund during that time. So it's nice to see some thoughts on the HELOC.

As far as the credit issue, we're not having any trouble with getting loans or a HElOC. I'm sure having great credit scores and a good loan to value ratio is helping.

But, we'll make sure to not take the HELOC for granted and will keep an EF in cash ready.
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Old 02-16-2008, 06:17 AM   #35
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This was a really germane post for us -- we're about to refinance our mortgage and then take out a HELOC to pay off a private debt. In the process of refinancing, we are using our emergency fund to pay down the mortgage even more (this frees up a lot of cash and will allow us to keep this place as a rental when we move). But it means we'll be operating without an EF for a few months, and we're planning on using the HELOC as an emergency fund during that time. So it's nice to see some thoughts on the HELOC.

As far as the credit issue, we're not having any trouble with getting loans or a HElOC. I'm sure having great credit scores and a good loan to value ratio is helping.

But, we'll make sure to not take the HELOC for granted and will keep an EF in cash ready.
Operating without an emergency fund is like playing Russian Roulette.

Don't assume the HELOC will always be there to draw from.In this enviornment,it's here today and it may be gone tomorrow.

Here's a story about a man who paid off his HELOC with all of his savings,only to have it frozen days later by Bank Of America.

Lenders block home-equity line withdrawals North County Times - North San Diego and Southwest Riverside County News - NCTimes.com - Californian.com
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Old 02-16-2008, 09:02 AM   #36
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Eh, I'd be annoyed for the full five minutes it'd take me to close the 'frozen' account and open a new one at a bank that'd like to have my business.

Everything and anything can go poof at any time. A rock could fall out of the sky and hit me in the head right...ooof! Ow! Hey! Who the hell is throwing rocks over there?

BTW, I never get anywhere near a high LTV on these. I think my heloc on my old mcmansion was about 15-18% of its value, and the one on my last house was about 20% of what I paid for it.

More than enough for an emergency or to help with a temporary cash flow problem, but not enough to worry about valuation drops, making a troubled bank nervous, or to get myself in trouble.
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Old 02-16-2008, 09:11 AM   #37
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BTW, I never get anywhere near a high LTV on these.
Yep. A year before retiring I got a HELOC in the 40% range. No cost to set it up (other than the $4,000 minimum I had to initially draw - paid back in 30 days) and no ongoing fees. Simply a 'just in case' source of quick funds.
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Old 02-16-2008, 09:41 AM   #38
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BTW, I never get anywhere near a high LTV on these.
Yeah, our HELOC is in the 10% range. If we have an "emergency" greater than that I would prefer not to risk our house in the rescue attempt. Or, at least, make that the "last resort."

On the other hand, I am relying on that source of funds being available if needed. In fact, I consider that a "solid" contract between us and the bank. But then on that other hand (is that 3?), our relationship with this bank is not what it used to be. We now write about three checks a month and, truly, treat them simply as a Clearing House for fund Transfers. It has been several years since I have actually been inside the building to speak with a person. Now that I think about it, in the 35 years we have had accounts with this bank it has changed hands five times -- all in the last 6-7 years. Wow! Is this depressing... and scary.
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Old 02-16-2008, 10:55 AM   #39
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Yeah, our two banks dont like me either. I only used one of them to wash a half million bucks because vanguard wanted to take 10 days to send funds to my escrow account since they were a "new account", while they'd overnight transfer to our existing bank account, who was more than willing to do a same day transfer to the escrow account. Didnt put a penny in or out other than our minimum balance ($25).

The other bank I just use to deposit lots of small checks when I'm in the store shopping and walk by their ATM. Then once a month I EFT the few hundred bucks to vanguard. Saves me the trouble of filling out a deposit slip with vanguard and making up a mailing envelope. I do leave a few hundred bucks in that account as an emergency source of pocket money.

No wonder the banks are pissed, in financial trouble, and trying to sock people with huge fees.
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Old 02-16-2008, 12:02 PM   #40
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Yeah, our HELOC is in the 10% range. If we have an "emergency" greater than that I would prefer not to risk our house in the rescue attempt. Or, at least, make that the "last resort."

On the other hand, I am relying on that source of funds being available if needed. In fact, I consider that a "solid" contract between us and the bank. But then on that other hand (is that 3?), our relationship with this bank is not what it used to be. We now write about three checks a month and, truly, treat them simply as a Clearing House for fund Transfers. It has been several years since I have actually been inside the building to speak with a person. Now that I think about it, in the 35 years we have had accounts with this bank it has changed hands five times -- all in the last 6-7 years. Wow! Is this depressing... and scary.
Solid contract is fine, just make sure you read the fine print. Last I looked, it usually gives the bank lots of leeway to do whatever they feel like.

I don't do much with my local bank either, and I am probably a marginally profitable customer at best. So I have my HELOC with Schwab, where I know I am a valued customer that is worth a lot to them. So I presume they will be more hesitant to jerk me around on the HELOC.
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