Naples Daily News reports:

“The Small Business Administration (SBA) is alive and well. However, participating banks are returning to the basic tried and proven underwriting standards of an earlier generation. Startup businesses will find it quite difficult to secure any type of financial assistance unless they can demonstrate a clearly defined business plan and are prepared to invest up to 25 percent of their own money in the venture. These sums must not be tied to other forms of credit, such as a home equity loan, unless the HELOC can be repaid from sources other than the earnings of the business.”

Only take out a home equity line of credit if you anticipate a need for the money. If you don’t have a plan, you may want to save your equity for unexpected needs.

See Also:

Is a HELOC Right for You?

Where to Put Your Home Equity Funds

Before putting your name on the dotted line, be sure to read all paperwork thoroughly. Your lender must also meet requirements included in the Federal Truth in Lending Act.

Learn more about HELOC contract negotiations here: Negotiating HELOC Terms
Learn more about federal obligations here: The Federal Truth in Lending Act.

See: How to Negotiate the Best Home Equity Rates and Terms

The Street recently published an article explaining the biggest risk factor:

“A bank can freeze an existing HELOC if the amount of equity remaining in the home, as measured by the difference between the credit limit and the home’s value, declines by half. Say you own a $200,000 home with a $100,000 mortgage and a $50,000 HELOC. That leaves $50,000 in equity in the home. A drop in home value to $175,000 would leave only $25,000 in available equity, a 50% decline. Your lender would have grounds to freeze your HELOC.”

If you do receive a HELOC freeze notice, you may be able to seek recourse. Check out my list of ways to revive your home equity line.

See Also:

HELOC Lender Obligations Under the Truth in Lending Act

HELOC Foreclosure

CNBC reports:

“The FBI says HELOC thieves typically use stolen identification to apply online for a line of credit in your name. Then they instruct the bank to wire the funds to their accounts, providing their own contact information in place of yours. That way, the bank unwittingly contacts the thief to verify the electronic funds transfer.

Although the FBI does not track the dollar amount lost each year to mortgage fraud, incidents reported by financial institutions jumped a whopping 31 percent (from 35,617 to 46,717) in fiscal 2007, over the previous year. The sudden spike in HELOC fraud prompted the Mortgage Asset Research Institute, a Virginia-based organization that tracks mortgage fraud, to add identity theft as a category to track.”

According to the article, many experts believe that the shift to home equity fraud has happened because it is now more difficult for identity thieves to take out subprime loans in the name of less credit-worthy borrowers.

Protect yourself from home equity fraud by checking your credit report regularly. Everyone is entitled to see a copy of their report annually at no cost.

See Also:

New Program Detects HELOC Application Fraud

HELOC Identity Theft Scams

However, now that banks are freezing home equity lines, some borrowers may feel safer taking out a home equity loan. These loans disburse a flat sum of money and are unlikely to be called due. Although home equity loans tend to have more expensive closing costs, the peace of mind may be worth it.

For a more extensive comparison of these two options see: Home Equity Loan vs. Home Equity Line of Credit

Stock investing is making a wager with your home. If stocks fall further, you have a lot to lose.

There are a few smarter ways to make money with a home equity line of credit in today’s market. It does take a bit of financial savvy (comparing interest rates and terms) as well as some serious responsibility (never missing a payment).

If you’re up for it, consider this tip from a recent BusinessWeek article:

“…those who can still tap their HELOC can use it to build up cash and, in rare cases, make a little money. If your HELOC rate is 5% or lower, consider drawing down that cash and buying a one-year certificate of deposit that’s yielding north of 4%, says John Ulzheimer, president of consumer education at Credit.com. You’ll also get a tax deduction, which can help make up for the difference. “If HELOC rates go up, pay down the money and you are off the hook,” he adds. The main point is to gain access to cash, with the arbitrage a side benefit.”

Remember to invest smartly. Choose investments that are insured by the FDIC and that you can break early if neccessary.

See Also:

Using a Home Equity Line to Buy Stocks

5 Financially Sound Ways to Use Your Home Equity Line of Credit

First: you can take advantage of recent prime rate reductions for an interest rate significantly lower than those offered by most credit cards. Apply your savings to your bill and you’ll be able to save money while paying off cards faster.

Second: you may be able to improve your FICO credit score when you transfer the debt to your home equity line. How your score is affected depends on whether your HELOC is listed as a mortgage or installment loan.

This strategy can save you a lot of money. However, it is important to use caution: unlike your credit cards, your home equity line is secured by your property. If you cannot pay back your HELOC, you could lose your home.

Learn More: Will Paying Off Credit Cards With a HELOC Improve My Credit Score?

The New York Times recently published a helpful article detailing some of the ways people are temporarily investing their HELOC funds.  Here’s a blurb:

“Those who withdraw their home equity should consider putting the cash into a certificate of deposit, a savings account or a money-market account, Mr. Ben-Ami said…

Short-term liquidity is a key advantage, as borrowers may well be using their credit lines for college tuition bills or as emergency funds if they lose a job or face a major home repair.

Interest rates paid by C.D.’s were at least 3 percent last month, Mr. Ben-Ami said. “So on an equity line of $100,000, the annual cost of this strategy is approximately $1,000” — the difference between a cost of 4 percent and income of 3 percent, he said.”

These all look like good options for borrowers who need to tap their HELOCs in the coming months. Savings accounts and CDs are particularly good choices. But, whatever you do, don’t store your borrowed money in the stock market.

See Also:

Facing a HELOC Freeze? Here’s Where to Send Your Complaints

Some Advisors Urge Homeowners to Withdraw Home Equity

Strategic Withdrawals to Avoid the HELOC Freeze

Chris Farrell from American Public Media Marketplace explains:

“Yes, stocks may offer a high potential return, but only by taking on a considerable amount of risk. Remember, stock market returns are not guaranteed, but you will have to meet the interest payments on your loan no matter what–or put your house at risk. Borrowing on your home to invest in the stock market is always a bad bet. And in the current environment people need to be paying down debt, not adding to it.”

By withdrawing from your HELOC, you turn a stock purchase into a gamble secured by your home. This is the kind of irresponsible risk taking that caused a lot of the national financial troubles we’ve seen this year.

See Also:

5 Financially Sound Ways to Use a HELOC

Avoid Using Your Home Equity Line of Credit for College