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Should You Cash Out Your Equity Line?

April 16, 2008

Heard on the street….heard at the Zephyr weekly office meeting…heard at a real estate conference on Monday…read in Gretchen Morgenson’s column on April 13th in the NYTimes.

That’s enough frequency to make us ponder the question, “Should you max out your Equity line?”

WHAT’S HAPPENING?

Equity lines (aka Lines of Credit or LOCs) are being cancelled by banks because of lender fears and fallout in the declining markets nationwide. In other words, homeowners with run of the mill equity lines that may or may not be even close to maxed out are receiving notice of termination from their banks.

They did not miss a payment. They have equity in their homes. Their LTV is not too high. The banks are freaking out. This is just another way the nation’s liquidity crisis and real estate meltdown is playing out for us lowly consumers.

WHO IS IT HAPPENING TO?

Most often, the cancellation of LOCs is happening in truly declining markets, i.e. areas where real estate prices have dropped and continue to drop.

However, it is also happening in healthy markets. Oy vey.

WHAT TO DO?

What to do depends on your situation.

Do you need the equity line for an upcoming expense, like home improvement, college tuition, etc?

What do you use the LOC for, emergency reserves, rainy day funds, a piggy bank for your indulgent personality? (Unless you’ve been hiding out in a cave somewhere for the past year, we truly hope that last answer is not the one!)

What is the worse-case scenario for you should your LOC be cancelled without notice?

Can you think of a safe place to keep your cash from the LOC until this blows over? Can you think of a place where your cash might actually earn you more than you are paying on the LOC?

How risk sensitive are you?

These questions and more may lead you to cash out now, before or in case your LOC goes bye-bye. Or they may not.

WHAT IF I DON’T HAVE A LINE OF CREDIT?

Get one…if you still can! Used correctly, a home equity line is an important financial safety net. Don’t abuse it. See above.

WHO CAN HELP ME?

The go-to person to ask about your situation is your trusted mortgage advisor. In this climate, we hope you have a truly trusted and trust-worthy advisor. And if you don’t, ask us & we’ll give you a few solid references.

Tags: liquidity+crisis,
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