Home Equity Line of Credits Being Drained

Shhh, do you hear that? That gurgling noise you hear is the sound of equity coming out of your home. Since January of 2008, home equity lines of credit are being dropped as fast as they were being pumped up just a short time ago. Only six months ago, you could find home equity line of credit loans for 100% of your home's market value - some even at 125%. Today, most banks have dropped the offer to 70-80% of the value of the home. The reason is falling home prices.

I decided to check one of the best managed banks out there, my bank - USAA Federal Savings to see what was going on with them. USAA Federal Savings is a military bank and manages their company with low risk investments. They are calling customers in areas that have seen significant drops in home prices. They are informing their customers that their outstanding line of credits are now cut back from 100% of the value of their home to 70%, less the customer's outstanding balance. This is effective immediately. According to them, they are one of the last banks to be doing this. So, if you haven't been called by now, perhaps your balance is still within the guidelines of your bank.

Home equity lines of credits are used by many homeowners for many reasons - home improvements, purchasing cars, college tuitions, etc. Recently, it's been reported that baby boomers are tapping into their line of credit just for day to day survival. However, the tapping is running dry as the real estate crisis is seeing no end in sight.

The banks are not using a real estate appraiser to value your home. They use an across the board computerized comparable market evaluation for a one mile radius in your area to determine the value of your home. An appraiser gives a more accurate market value for your home. This computerized type of market approach takes an average of inexpensive to expensive home sales for a given period and puts a factor on it for all homes. So, even if you live in an expensive neighborhood and a mile away you have much less expensive homes selling more on average, the expensive homes will suffer in value because of the lower sale prices from the least expensive homes. This is how the banks evaluate your home values for a home equity line of credit.

If you fall into this category where your home equity line of credit is reduced, some of the tips below might help raise your line of credit.

1. Check your county property tax records to see if the information stated is accurate. If you found that your square footage is less on the tax records than what is stated in the bank's computerized market analysis, then that will increase your line of credit. The reason is because this is what the value is pulled from - the property tax records.

2. Pay a real estate appraiser that is approved from your lender's list to have your individual home appraised. The bank won't pay for this. However, if you feel they low balled you too much based on this computerized market value approach, then it could be worth it for a few hundred dollars out of pocket to have it done professionally. However, educate yourself to know what has been selling by asking around or calling a Realtor.

3. If you are planning on remodeling, it is possible that could increase your total value of your home.

4. Call your bank up and have them verify the market value of your home to the amount they claim they will loan to you, i.e. 70% loan to a 200,000 home value = $140,000 loan amount. If your outstanding balance is under that amount and they are telling you that you cannot borrow any more, then ask them to "show you the money". It's always best to verify the numbers because you don't know if they made a mistake in their calculations.

There is a false sense of hope that is being reported that the credit crunch is pretty much over. Well, all you have to do is go ask the people who cannot tap into their line of credit any more. The rules are changing and they are changing fast when it comes to how much the lenders are willing to loan out to home owners against their equity. It makes no difference if you make a six figure income, fantastic credit, or even having no other outstanding debt. As long as the prices keep falling, the banks are continuing to lower their risk in the real estate market.