Some financial experts are advising HELOC customers to withdraw funds from their credit lines now, in case the HELOC freeze continues to spread. Over 100,000 borrowers have already been notified that their HELOC has been frozen or canceled – some speculate that the freeze notices will continue as the national real estate market declines.

The downside of withdrawing funds from your HELOC is that you will be charged interest until you pay back the money. Many people take out HELOCs instead of home equity loans because they want to have money at their disposal and not pay interest until they choose to withdraw. Removing funds from your HELOC now negates that benefit.

If you were hoping to withdraw from your HELOC sometime later this year, you may be able to counterbalance the interest charges by putting the money into a high-yield savings account or CD. San Francisco mortgage consultant Julian D. Hebron recently published a helpful blog post that shows how HELOC borrowers can withdraw money from the HELOCs now and still come out ahead of the game:

If borrowers have open lines of credit they were planning to access during 2008, they should strongly consider taking a draw now, before an unforeseen limitation on their ability to access their equity. The Prime Rate is the benchmark rate for HELOCs and is currently 6%. HELOCs are priced at Prime plus/minus a base rate. The current average HELOC rate for a good credit borrower with some equity is about 6.5%. In most cases, interest on HELOC amounts up to $100,000 is tax deductible. If a borrower is in a 33% tax bracket, the after tax rate on this money is about 4.355%. So if they took a HELOC draw and placed it into a CD or another similar liquid vehicle earning approximately 4.5% (or 3.015% after tax), they can ease the cost of those funds on an after tax basis.

If you’re looking for a place to keep your HELOC funds until you’re ready to use them, there are several competitive options right now:

Countrywide is offering a 6-month CD with a 4.10% APY. The minimum balance is $10,000.

Primer America is offering a 6-month CD with a whopping 7% APY. There is a $1000 minimum and a $5000 maximum. Because Primer America is a credit union, you may have to meet certain requirements (live in a particular area, have a particular employer, or pay an application fee) to join.

If you’d rather keep your HELOC funds liquid, Washington Mutual is offering an attractive savings account with 4% APY, when the account is linked to a free checking account.

See Also: What to Do if You’re Hit by the HELOC Freeze

Tags | CD, Heloc, heloc freeze, home equity loan, lenders, loans, savings accounts