Here’s how the scam works:

“Some con artists steal consumers’ identities to drain Home Equity Line of Credit (HELOC). These HELOC loans differ from standard home equity loans because a homeowner can borrow against a line of credit. In many cases, con artists pose as customers to open HELOC Internet account services. They manipulate customers’ account verification processes, including rerouting telephone calls, forging signatures, using passwords, and reciting recent account histories. A con artist, for example, may use a consumer’s information to contact a financial institution and request an advance on a account. Once the advance is given, the con artist sends a fax to the financial institution and requests the funds be transferred to another account. When the financial institution receives that fax, it contacts the account holder to verify the transaction. The call, however, is unknowingly forwarded to the con artist, who verifies the account holder’s information to complete the transfer.”

If you’re a HELOC customer, be sure to keep your financial records private. Instead of throwing away past statements and credit offers, shred them. When going to financial websites (such as your bank’s site, your bill pay site, or your student loan site) type the complete URL into your internet browser instead of using an auto-fill feature.

If you notice any suspicious withdrawals from your HELOC account, notify your lender immediately. It’s better to be mistaken than to end up another HELOC identity theft victim.

HELOC debit cards are extremely convenient. To use your HELOC line, just swipe the card like a traditional credit card. No need to worry about writing a check or visiting a bank.

Unfortunately, their ease of use makes it tempting to make unnecessary purchases. Daily purchases here and there can add up. Use your card for an ipod, a new pair of shoes, and other “just for fun” purchases and it’s amazing how fast you can rack up $20,000 or more. Suddenly, you’ve used a good share of your home’s equity without getting much in return. (Paying for home improvements or college tuition, on the other hand, will give you the chance to earn the money back).

If you have a HELOC debit card, realize that it holds more risk than a traditional credit card:

If you can’t make payments on your traditional credit cards, you may be charged late fees. The credit card companies will eventually cancel your lines. They’ll call you repetitively and may be rude. But, you won’t lose your home or other assets. In seven years the debt will be wiped from your credit score.

If you cannot pay back your HELOC, you’re in much bigger trouble. Your HELOC lender will eventually foreclose on your property. If the debt is not satisfied by your home’s foreclosure, the lender can seek the money from you personally. HELOCs are almost always recourse loans which mean you are liable to pay back the money. A judge may even decide to garnish your wages.

So, use caution when swiping that HELOC debit card. Shred it if you need to. Or go ahead and make an ice cube out of it…just be careful not to serve it in your next punch bowl.

See Also:

How a HELOC Works

Answers to Common HELOC Questions

While HELOC rates are currently low, some analysts believe that inflation will eventually lead to higher rates in the future. Should this scenario hold true, borrowers with fixed interest rates will have the advantage.

Consider this example from TheStreet.com:

“Rising rates aren’t bad news for all borrowers. If you hold a long-term fixed rate loan, higher rates won’t affect your payments. What’s more, rising inflation will reduce the value of your monthly payments. For example, an inflation rate of 4% reduces the value of a $2,000 monthly payment to $1,643 in today’s dollars over five years.

By contrast, borrowers with variable-rate debt suffer from rising rates. Say that you qualified for a 30-year 3/1-year ARM (an adjustable rate mortgage whose rate is fixed for three years and then adjusts annually) at a rate of 5.5%. Your payments for the first three years would be $1,135 a month on a $200,000 mortgage.

A one percentage point increase in rates will boost your payments to $1,255 — and a three percentage point increase in rates could leave you with a monthly mortgage payment of $1509. That’s an extra $374 you’ll need to come up with each month, assuming rates don’t climb even further.”

HELOC borrowers may have the short term advantage, while those with fixed-rate home equity loans win out in the end. If you’re a HELOC customer worried about the possibility of inflation-related rate increases, you could refinance to a traditional home equity loan.

Alternatively, you may want to use your low-interest HELOC now and convert the withdrawn amount to a fixed rate when the market begins to shift. Not all HELOC lenders offer the conversion feature, however, and it can be extremely difficult to accurately time rate increases.
See also:

Home Equity Loan vs. Home Equity Line of Credit

Usually, HELOC lenders will keep the positive balance on the books and credit the borrower the next time money is owed. However, if the balance is very low the bank may just pocket the change.

A recent Consumerist article  shares the story of a HELOC customer who lost his overpayed balance:

“Today I got my statement for this month. There was one transaction, on the closing day of the month, for $0.78. The transaction was an “ACCOUNT ADJUSTMENT”. My balance was now $0.00, instead of -$0.78.

I called customer service to ask about this transaction. The agent first said that the note on the transaction stated it was an additional interest charge for 2007. That didn’t make sense, and I told her it looked to me like Wachovia just took my money away from me. After putting me on hold, she came back to tell me that I was right. “The account will automatically zero out if it is less than $1.00.”

It may not be a lot, but over the next 10 years a dollar here and there can really add up. Best bet: if you don’t want your HELOC lender to pocket your overpayments, always write a check for the exact amount owed.