A recent report summarized on the Calculated Risk blog explains:

“Going forward, the largest increases in the share of negative equity will most likely occur in states that have not yet experienced deep declines. The reason: the boom/bust states already have very high negative equity shares and incremental declines in home prices will result in smaller negative equity share increases relative to other states given the same decline in prices. This means that as prices continue to decline in 2009, the rise in the negative equity share of states outside the boom/bust regions will begin to accelerate more quickly relative to the boom/bust states.”

What does this mean for potential HELCO borrowers? If you’re considering taking out a home equity line of credit, you may want to do so before your area faces an increase of negative equity. You may also want to consider other options, such as traditional home equity installment loans, to avoid the possibility of HELOC line freezes.

See Also:

Is a HELOC Right for You?

HELOC Freeze Help

There’s no right answer. Instead, the best answer often depends on the reason the borrower wants a second mortgage loan.

BankingMyWay puts it this way:

“An installment loan is best if you have a single, large need, like a home renovation, since you know the rate will not go up even if you stretch the payments over many years. The HELOC is best used as a back-up fund, to get you through short periods when expenses exceed income. Because the rate on your balance can rise, it’s best to use a HELOC sparingly, and to pay your balance off as fast as you can.”

HELOCs tend to have lower initial fees and lower rates than home equity loans. But, their rates are not fixed and the line can be reduced (as we’ve seen in current months).

For more considerations and a chart comparing the two options, see: HELOC vs. Home Equity Loan.

“Reverse mortgages work by basically taking out the equity in your home — selling back what you own in the home — however, reverse mortgages in particular are packed with fees that can lose you up to 20 percent of your equity. If you’re really feeling hardship, take out a HELOC, home equity line of credit, instead. It can be a tax deduction for her as well and all you pay is the interest and maybe small administration fees.”

Lower fees plus a tax deduction makes the decision a no-brainer for most homeowners.

See Also:

No Retirement HELOCs for Baby Boomers?

I’ll admit to watching homes in my neighborhood sell for less while rationalizing my own inflated value saying “Well, my place is different because…blah, blah, blah.” But, now that values have fallen so dramatically, it’s pretty hard to pretend it isn’t happening.

Inman News reports on the shrinking “misperception index”:

“Fifty-seven percent believe their home last value last year, up from 38 percent of those surveyed in the second quarter of 2008. In reality, 76 percent of all U.S. homes lost value in 2008, according to analysis of the Zillow Q4 Real Estate Market Reports.

With these new findings, Zillow’s Home Value Misperception Index shrunk to 10 in the fourth quarter, from 16 in the third and 32 in the second quarter. An index of zero would mean homeowners’ perceptions were in line with actual values.”

As more people admit to their declining equity, existing HELOC borrowers become more likely to accept line reductions imposed by banks and potential borrowers worry about the risks of taking out a HELOC in today’s market.

Although the majority of borrowers feel that the worst is over, many feel safer taking out a fixed-rate home equity loan rather than a line of credit that has a chance of being cut should the market continue to decline throughout 2009.

See Also:

HELOC vs. Home Equity Loan

Is a HELOC Right for You?