HOME EQUITY LOANS: ARE THEY DEAD?

While property values were rising HELOC or Home Equity Line Of Credit were the means by which home owners were able to pull or tap their equity. The funds were used for any purpose by their owners: buy a car, pay-off debt, invest, travel, etc...

Most HELOCs were interest only and were based on the prime rate: the borrower pays interest on the amount used instead of the whole line. Even though these loans were considered second mortgages, they differ from the traditional seconds that have a fixed rate. The borrower is paying back interest and principal, and the loan is not "renewable", meaning that when the loan is paid down the owner cannot pull more money from it.
A HELOC allows the borrower to withdraw up to the maximum line, pay it down and continue to have access to the remaining balance.

Double Whammy:
The interest in and the availability of HELOCs were hit by two major events: one is the rise of the prime rate and the other is the decline in property values. Most HELOCs started at around 3.99% and went up to 10% with successive increases of the prime rate. Lenders were willing to go as high as 100% (1st and 2nd). In the current atmosphere characterized by low liquidity and low values, most Lenders will no longer accept such risks.

Is this the end of HELOCs?
It is difficult to predict but one thing is certain: the liberal lending policies being put on hold, borrowers will experience some difficulties gaining access to easy financing. Some HELOCs will be given to those borrowers who still have some equity left in their properties and whose credit scores are high enough to qualify.

This is just another sign of the times we are living in.