23 Jul Consumers Getting Shut Out of HELOC’s as an Option to Raise Cash During the Coronavirus Pandemic
- Interest rates have dropped to historic lows, making now a great time to refinance or take out a Home Equity Line of Credit (HELOC).
- Lower interest rates mean saving on variable rate loans like credit card balances and HELOCS.
- In light of the pandemic, Banks are raising lending requirements, and in some cases, pausing applications for HELOCS and other credit lines.
- Refinancing and new mortgage processing times are increasing due to the logistics around various loan processing procedures put in place during the global pandemic.
Following over 20 million job losses between mid-March and mid-April, Americans are scrambling to find ways to make up for lost income. The CARES Act offers limited relief in the form of one-time direct payments and extended unemployment benefits, but for many, it is not enough to shore up finances.
When you are short of cash, you must bridge the gap between income and expenses. Turning to available lines of credit from either credit cards or the equity in your home are common solutions.
What do Low-Interest Rates mean for Your Credit?
In response to the pandemic and the economic shutdown that followed, the Federal Reserve lowered the Fed Funds Rate to zero, which reduced the Prime Rate to 3.25% from 4.25%. Consumers now benefit from lower interest rates on accounts connected to Prime.
Both credit cards and home equity lines of credit, commonly referred to as HELOCs, carry variable interest rates directly tied to Prime. Lower rates help in times of crisis. However, credit card interest rates, average 16% or more. HELOCs can be as low as the Prime Rate and becomes an inexpensive source of financing for families struggling to keep bills paid and put food on the table.
Unfortunately, banks are taking steps to block your access to cash when you need it the most.
Bank Lending Policies
Banks, worried about an impending recession and a rise in foreclosures, are taking steps to lower lending risks. Common measures include lowering credit card limits, canceling credit cards, pausing HELOC applications, and increasing lending requirements. These measures shut marginal borrowers out of the home refinance and HELOC markets.
Two of the nation’s largest banks, Wells Fargo and JP Morgan Chase, paused HELOC applications in the wake of the pandemic. Wells Fargo stopped accepting new applications as of April 30 and Chase suspended applications as of April 17.
How Are Refinances and Home Purchases Affected by the Pandemic?
In addition to suspending applications for equity lines, some banks are not processing cash-out refinances, and nearly all tightened lending restrictions, making it harder to get approved for a new loan. For example, Wells Fargo raised the minimum credit score from 680 to 720 on home equity loans and will not offer cash-out refinances at this time.
JP Morgan Chase changed standards by requiring higher FICO scores and larger down payments on home loans along with lower LTV (loan to value) limits on refinances. Instead of allowing consumers to receive 80% or more of the home’s value, limits can be as low as 70%.
The loan process itself also takes longer because it is more difficult to complete due diligence such as inspections and appraisals. During the pandemic, the average time to close on a home loan increased from 26 days in January to 60 days at the end of March. These extended times will continue for the foreseeable future.
Where to Find Help If You Are Struggling to Pay Bills
There is only so much cost-cutting you can do to preserve cash. If you have limited savings, and no ability to borrow, you may not be able to keep up with all your bills.
While business bankruptcies make the news, experts expect personal bankruptcies to follow. Especially after stopgap measures like extended unemployment end. Before you consider filing for bankruptcy, investigate debt negotiation options for unsecured debts like credit cards, which may offer the relief you need without the negative impact of bankruptcy.
Frequently Asked Questions
Should I take out a credit line or HELOC just in case?
Since a HELOC takes time to get approved, just like a mortgage, it is a good idea to plan ahead and have a HELOC in place well before you need access to the funds. A HELOC can be very helpful when you need access to funds at a more reasonable cost than credit cards.
Can you take out a HELOC and not use the funds?
A HELOC provides access to a pre-determined amount of money that you can draw on when you need it. While you don’t have to use all or any part of the funds right away, many HELOCs carry a monthly fee regardless of whether or not you have an outstanding balance, so closing lines you don’t intend to use can save you some money in the long term.
Should I take out a HELOC if I am worried about losing my job?
Applying for a HELOC while you have demonstrable income is a good idea because you then have access to cash when you may not be able to open new credit lines. However, accessing the funds during times of crisis, when your ability to make the monthly payments may be in jeopardy, may put your home at higher risk for foreclosure.
Is a HELOC a good safety net to have if I do not have sufficient savings?
Having a line of credit is a lower cost way to access capital when you need it quickly, however, a line of credit tied to your home can increase the chances you may lose your home in foreclosure if you take out funds and are unable to make the monthly payments.
What are the PROS and CONS of a HELOC?
PRO: HELOCs are much more cost-effective loans than credit cards in comparison.
PRO: You only pay interest on the amount of funds you take out, not the full amount of the credit line.
PRO: The interest on a HELOC is tax deductible if used for improvements to the home it is secured by.
PRO: While HELOC carry variable interest rates, those rates are much lower because they are secured by the home.
CON: An increase in the prime rate can increase your interest cost and raise your payment.
CON: HELOCs take a while to get approved, just like a mortgage, so plan ahead and secure your HELOC well before you need access to funds.
CON: HELOCs are tied to the amount equity available in your home, so if home prices drop substantially, your credit line may decrease or be eliminated altogether.
About Titan Consulting Group
Titan Consulting Group helps consumers evaluate various debt relief options and choose the right program that best fits their short-term and long-term financial goals. We work with consumers seeking debt consolidation loans, or who may be considering options like debt negotiation or bankruptcy. Through our network of partners, we can help you find the right solution to reach your goals and get back to living a life free from high interest credit card debt.
Contact us today at (888) 488-4517 or Apply Online now.