Home Equity Lines – They're Alive!

Who says there is no money out there to borrow against home equity?

After doing a little business with Bank of America in downtown Hartford the other day I was surprised to see a big sign in their lobby announcing Home Equity Lines with rates of 4.24% for $50,000 and $100,000 lines. The gentleman at the info desk assured me that not only was it still possible to get a home equity line, but that Bank of America has been offering them without interruption! I was not allowed to take a picture of the sign as proof, but I swear it exists. A quick search of the World Wide Web confirms that Bank of America is in the game, and shows that other lenders are also advertising home equity lines on their websites.

Home equity lines played a big role in our current financial crisis. Although they can serve a variety of purposes, many homeowners bet that home prices would continue to rise and used their line to extract all of the equity from their property. The cash in hand was spent on anything from home improvements to retiring more expensive debt to discretionary purchases with no enduring value. All the anecdotal evidence that I had seen suggested that banks either froze or cancelled outstanding home equity lines in an effort to manage the risk to their firm’s capital. The resulting reduction of available credit has been an inconvenience to some, and has actually hurt the credit score of others.

According to a local mortgage broker, home equity lines never completely went away. Instead the lenders simply became more conservative. They definitely froze and cancelled some lines, but at the same time they were still willing to extend new lines to very well qualified borrowers. If you had low loan-to-value ratios and good credit you have always been able to get a line. Lenders have also been changing their pricing. Where before they would offer a discount to Prime with no minimum rate, they are now charging a premium above Prime with a minimum interest rate of 4%. Finally, borrowers need to look carefully at the overall cost of a home equity line since very few people qualify for the advertised rates. Most borrowers end up paying additional points, fees, and/or expenses that increase the effective interest rate, or APR, of the line.

So it seems that the major financial institutions are still willing to add some risk to their portfolios. And we know that the government wants them to be lending despite being forced to provide considerable assistance to keep the institutions solvent. The underlying economic theory is the multiplier effect, which tries to quantify the overall impact of an additional dollar. In this case, each dollar that is loaned is spent and re-spent a number of times, spurring growth in the overall economy.

My conclusion after all of this is that although home equity lines are advertised as available, they might not be available to you. And even if you do qualify, the line may be more expensive than expected. As always, be careful when borrowing…