Warning if you are using a Home Equity Line of Credit

16 years ago

Hi-

I posted this on the Home Finance group, but thought that many renovators might be using a Home Equity Line of Credit to finance their current project like we were and would benefit from our experience this week-

We started a major home renovation project in Feb., and have been getting most of my great information from this site. I just felt like I had to share what happened to me this week, so that it might help someone else in my same situation.

We are very fiscally responsible people, and other than our mortgage we do not borrow money. After weighing all of our options, we decided to do a major renovation on our existing home rather than to move, and we plan to stay in our home for at least 10 years. After careful consideration, we decided to tap our Home Equity Line of Credit, which we have had on our home for over 5 years in order to pay for the project. We used it before on another project and paid it off two years ago with no issues.

We are now about 40% through our project, everything going fine. However, yesterday we got a letter from our bank telling us that they had FROZEN our home equity loan until we prove the current home value. This is not based on any specific information that homes in our area have decreased in price (they have not), but they "might" have so we have to get a new appraisal.

The issue is that we are in a catch 22- I have no doubt that when completed, our home will appraise high enough to qualify for the line of credit we have with them. The issue is that we are mid-project, and half of our home is down to the studs! That includes the kitchen and family room and bathrooms. We have the appraiser coming out tomorrow to see if he can still try to do a decent appraisal in it's current condition. In the meantime we have bills coming in from our contractor and we have to figure out a way to pay them.

If any of you are using your Home Equity Line of Credit to fund your project, please consider withdrawing the entire amount that you need for your project and putting into a savings account. That way you know it will be there- from what I understand that many banks are doing this (not just ours), and they do not care if you have great credit and have been a good customer.

I have done some research online and now I see that some financial people have been warning about this for a few months, but I was not aware of how bad it had gotten. I had to learn the hard way :).

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jen4268
Original Author

16 years ago

Thanks Kompy-

We had had the loan for about 4 years. I would advise anyone who is has not originated a new line of credit within the last 4-6 months to contact their bank before starting a project to see if they actually have the money they think they have.

The appraiser is coming in the morning, and we will see what we have to work with.

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Comments (6)

caligirl_cottage
16 years ago
That's a good warning. I think that people who are just now taking out a new Equity Line of Credit should be in a better situation, but people who have an existing or old line would be subject to getting a new appraisal. Perhaps one thing that people could do is to alert their bank that they are starting a major remodel so that the appraisal could be done before they take out the line. I think even trying to draw the whole thing down at once would trigger some major alarms at the bank and you'd be facing some kind of communication from them sooner or later.
kompy
16 years ago
Thanks for the heads up. That's crazy. Who knew if you already had a line of credit that they could take it away. Had it been a long time since you opened it? Nothing with banks surprised me anymore.

I'm a kitchen designer, so it's good to know. I'll keep that in the back of my head if any of my clients plan to finance their projects this way.

Let us know how it goes.
Kompy
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houseful
16 years ago
Wow! I almost never read this forum and am so glad I did. We are just getting ready to sign papers for a HELOC and may be in a slightly different situation since it's brand new. However, I will keep this in mind.

I sincerely hope things work in your favor.
decorpas
16 years ago
Not to mention the fact that due to the falling real estate market, in some places appraisers are unable to support reasonable values. Even newer Home Equity Loans will be subjected to these problems at times, at the banks are under significant pressure to prove values-- which is almost impossible when things are in such a state of flux and panic. In other words, value is perception, not reality.
igloochic
16 years ago
Drawing your equity loan to it's fullest extent will not prompt a demand notice from the bank...it's completely allowed. If they have issues with establishing value, which is the case in the above posters problem, than they can ask for a new appraisal (read the documents!). If that appraisal does not support the value, they're unlikely to forclose...but are likely to want to work something out with you.

You may have to turn this deal (OP) into a construction loan. The appraiser can do an "as proposed" appraisal, verses an "as is" which is what you're currently doing...and that's going to be a big problem.