September 5, 2017

Banks love HELOCs because they bind you, the consumer, to (them) one institution for a long term. You cannot shop for better rates until the term of your mortgage is up.

Here’s how it works – imagine you have a house valued at $250,000.00 and you are in the process of renewing a mortgage for let’s say $125,000.00.   You banker suggested you consider a form of home equity financing that will allow you to obtain better rates on credit cards and a line of credit.

All you have to do is “sign here, initial there and there”.  Oh, but “if you decide not to take it today” then it will cost you more in the future because “you will have to pay additional legal fees”.  The hook is in and the pressure is on.

You are told that you go up to 80% of the value of your home – so, since the mortgage is only $125,000.00 you have instant access to $75,000.00 which can either be used on your credit card or on your line of credit (each having slightly different rates of interest).  Just “sign there, yes by the ex, and initial there and initial here” – it’s that easy!

The bank will then register a lien, in first place, against your property for a value of $200,000.00 in correspondence with the total value of available credit.  Life is good for you, as long as you are not tempted to use the credit card and line of credit.  If you do, you will find yourself on a slippery slope that can quickly erode the available equity in your property and leave you paying very large payments to the bank.

If interest rates went down and you wanted to renegotiate your payments with another institution you would have to pay out the bank “in full” for all of its lending (to you) plus penalties.  You are unable to negotiate a new second mortgage at a reduced rate to consolidate the credit card and line of credit – you are pretty much stuck with the same bank for the entire remainder term of the borrowing.

Some people are surprised when thinking about selling their homes to buy another and they discover that they are required to pay out the full balance (of all their borrowings) leaving them with much less than they had anticipated to be put towards the new purchase.

Are HELOCs a good idea?  They are probably a great idea for lenders – but not so much for consumers.  Sage advice – keep your mortgage separate from all your other borrowing and focus on paying down, not adding to it!  You will save yourself thousands of dollars in the long run.