There is an old adage that says,
“A Banker is a fella who will lend you his umbrella and then ask for it back when it starts to rain!”
Now you might find that saying amusing unless it happens to you. And the risk of this happening may be more prevalent and possible now than in times past. Read on and I will explain.
Back during the housing crisis when banks were in big trouble and credit was getting tight, a friend of mine told me that his bank closed his home equity loan. What does that even mean you might ask?
Well, my friend was in business for himself and if you are a small business owner cash flow can sometimes become a problem.
You have months where everything is going along fine and then you have months where they are just not.
And a lot of times there is not much you can do about it.
You know the business will pick up again, but the problem is paying the bills and keeping the business open until that happens.
Anyway, some of us without a small business to run can relate to having a cash flow crisis.
In fact, I have some of my best clients who did what my friend did for a similar reason.
They open up a home equity line of credit just in case they have a cash flow emergency.
How can a home equity line of credit help during a cash flow crisis?
Well if you take out a line of credit it is like having an instant loan waiting to happen.
Say you have a $15,000 home equity line of credit and then you have a bad month in your business.
You can call up the bank and take out that $15,000 instantly without any paperwork or qualification because you set it up in advance for exactly that purpose.
And normally you only are required to make interest payments on the loan, not principal payments, so you will not have to start making big payments back to the bank until you are out of your crisis.
It can be a great financial tool to have set up just in case. But there is a big problem.
The bank can close that line of credit whenever it feels like it and your emergency cash dries up overnight, no more access.
That is exactly what happened to my friend back during the housing crisis.
He was counting on that money to help him keep his business afloat and then one day he got a letter in the mail and found out that the Bank had closed his line of credit.
But get this, they did not close it because of anything my friend did wrong.
In fact, he had excellent credit.
They closed it because the bank was feeling economic pressure.
Another thing you might not know is that your bank can not only close down the option to get money, but they can CALL IN or ask you to pay back your existing home equity line any time they want.
Your first mortgage on your home is not callable but many home equity lines give the bank the option to CALL the loan during difficult economic times.
The reason I am bringing this to your attention is, just recently JP Morgan Chase has suspended all Home Equity Loan applications.
This does not mean they are calling loans or even closing equity lines on people just yet, but they are not taking on any NEW home equity lines at this time.
“Due to the economic uncertainty created by COVID-19, we’re temporarily not accepting
applications for new home equity lines of credit”
What does this mean for you? Well, a few things.
- Home equity is a terrible safety net.
I have been preaching this for years!
It is not the value of your home that gives you access to your own money when it’s sitting in your house.
It’s your ability to pay it back! Let me say that again a different way.
Paying extra money to your mortgage is NOT a great idea because when you need that money the most.
Like I do not know during a CRISIS.
You will likely NOT be able to get it.
Think of how many people are out of work right now.
Would not having access to the extra payments they have been sending to their lender help them get by.
Well, guess what that is exactly the time when the banks get strict on lending.
Stop paying extra on your mortgage, it is just not safe.
Your bank is never going to lend you money when you are out of work.
And that is when you need it the most. Umbrella anyone.
- Do not rely on a Home Equity Line of Credit as your emergency fund.
Why? In an emergency, the bank may very well take back that option and leave you out in the cold.
- Did you know there is a special kind of Home Equity loan called a Home Equity Conversion Mortgage that only seniors can qualify for that eliminates many of these problems?
Only with this special kind of Home Equity loan your line can NOT be frozen or called due by the lender as long as the terms are met.
In fact, this line of credit grows at a predetermined guaranteed rate so your access to cash will get larger and larger every year.
And it’s guaranteed to grow no matter what is going on in the economy.
If you are not sure if you’re using your home equity as wisely as you could be and your current advisor has not brought this to your attention, maybe it’s time to chat.
Sure, my main job as an advisor is to grow my client’s money but if I didn’t also make them aware of pitfalls and opportunities like this what kind of a job would I be doing? What kind of an advisor would I be?
If you would like to learn more about how I might be able to help please click on the link below to watch a free short video that explains how the Nurses and Pre-Retirees we work with can potentially avoid going broke in retirement and hold on to their nest egg. It’s free to watch so go ahead and click on the link now. FREE Video
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