This Lifeline for Homeowners Is Hard to Come by During Coronavirus

by Maurie Backman | Updated July 19, 2021 - First published on Sept. 9, 2020

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When the economy is shaky, lenders are less likely to let people borrow against their homes.

Millions of Americans have lost their jobs in the COVID-19 crisis, while others are struggling with income loss or general financial insecurity. If you need to borrow money during the pandemic, perhaps the most cost-effective way is via a home equity line of credit, or HELOC.

There are several benefits to a HELOC. First, you're not borrowing a lump sum -- you're getting access to a line of credit you can draw from as needed. If you secure a $10,000 HELOC but only borrow $4,000 in the end, you'll only pay interest on that $4,000. HELOCs are also fairly flexible, giving you five to 10 years to take withdrawals against your line of credit, then offering lengthy repayment periods of anywhere from 10 to 20 years.

HELOCs are also relatively easy to qualify for, since your home is used as collateral for them. As a result, you can get a HELOC even if your credit score is in the dumps. And the interest you'll pay on a HELOC is typically much lower than what you'd pay with a personal loan or credit card.

But while HELOCs are generally a great borrowing option, during the pandemic, they've become trickier to secure.

Why are lenders pulling back on HELOCs?

Lenders who give out HELOCs take on the risk that they won't be repaid. That risk is mitigated by the fact that HELOCs are secured loans, so lenders can force the sale of a home if a borrower is delinquent. But that's a cumbersome process lenders don't want to undertake.

Furthermore, while HELOCs are secured loans, they're considered second mortgages, whereas purchase mortgages and refinances are first-lien mortgages. If you default on your financial obligations and your home goes into foreclosure, your first-lien lender gets paid first, and your HELOC lender gets paid second. HELOCs are therefore riskier for lenders. That's why some have been hesitant to give them out in recent months, and why Wells Fargo and JPMorgan Chase temporarily paused HELOC applications earlier in the year.

What to do if you can't get a HELOC

To qualify for a HELOC, you'll need equity in your home. If that equity exists but you don't get approved for a HELOC, your next best bet may be a cash-out refinance, in which you refinance your mortgage, but borrow more than the remaining balance on your existing home loan.

Say you want a $20,000 HELOC, but are denied. If you have $200,000 left on your mortgage, but qualify for a cash-out refinance of $220,000, you can use the first $200,000 to pay off your existing lender and keep the remaining $20,000 to use however you'd like. The downside, of course, is that you'll need to pay interest on that $20,000. If you don't end up using all of it, you'll lose more in interest than necessary. With a HELOC, you could borrow half of that $20,000 and only pay interest on the part you needed. Still, given that today's mortgage rates are very low, a cash-out refinance may not be a bad idea if a HELOC doesn't work out for you.

Be careful with HELOCs, too

If you do secure a HELOC, pay attention to its terms. Like mortgages, HELOCs require paying closing costs. There will also be rules about when you can draw against your line of credit. In some cases, you have to take a withdrawal soon after securing the HELOC. Also, interest rates can be variable, so your rate may climb over time.

HELOCs can be a useful borrowing option when you need money, but as with any loan you take out, make sure you understand exactly what you're signing up for.

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