Thinking of using an equity line of credit for remodeling? Think again

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If you have an equity line of credit that you plan to use for home improvements, there is a chance the lender could cancel that line, according to an article in today's Washington Post.

With home values dropping, the article states, lenders are canceling equity lines of credit so that there is not more debt on the house than it's worth.

"Countrywide Financial, the nation's largest mortgage lender," the article says, "suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values."

Bank of America is beginning to do the same thing, a bank spokesperson said.

This naturally comes as a shock to people counting on their equity lines for such things as home improvements. Last year, according to a survey of lenders by BenchMark Consulting International, 29%of homeowners used their equity lines for home renovation.

So before you start tearing out your old kitchen with plans to refurbish it using an equity line, you should find out if that line will be available tomorrow.

The Times' Kathy Kristof reported on the trend earlier this month.

Comments

[bren]

This shouldn't really be a surprise to anyone. If your house is worth 100 thousand or so less you obviously have less equity. This really is a no brainer and if the banks think your house's worth still hasn't bottomed out why should they lend you money on something they know won't be worth that in a year or so. This is the first thing in the home morgage stories that really makes sense.

[Martin]

Bren writes, "This is the first thing in the home mor(t)gage stories that really makes sense."

My sentiments exactly. Let's not get all cheerleaderee about the banks that largely created this current financial mess. See the current news in the Los Angeles Times' L.A. Land blog about banks lobbying for a major federal bailout to cover their own mistakes.

However, the banks are finally wising up and not allowing homeowners to increase their increasingly higher LTVs (loans to house value). In the short and long term it only serves to hurts homeowners.

The banks are not saying homeowners can't remodel. They're just saying some homeowners can't do it on their dime and on a perceived value that no longer exists. It makes sense to me.