Max Your HELOC and Stash the Cash – Is this Dangerous Advice?

Lender’s nowadays are looking at all avenues to cut their risk and minimize their losses. Aside from tightening their guidelines for new home equity loans, it’s been no secret that many lenders have reviewed their existing loans only to freeze these credit lines. Well, there’s been some advice stirring up in the mainstream media proposing the idea of maxing out your home equity line and stashing the cash away to protect your liquidity. The Silicon Valley Examiner and San Francisco Chronicle had two recent articles this week talking about this strange new advice.

Back in August, I wrote a bit about the problem of Frozen HELOCs and much of the response was how to avoid this frustrating problem. Now, this “mattress-stuffing” financial advice could help you protect your HELOC funds, but today I wanted to just point out a few caveats before one considers this option.

Your Bottom Line
It always comes to down simple dollars and cents, and this method is going to cost you money. Even with the Fed funds rate sitting at 1% and Prime Rate at 4%, you’ll most likely be losing money by putting away this cash into CDs paying in the range of 3%. Now on a $100,000 HELOC, your spread is likely to be a loss of 1-2% which equates to a one to two thousand dollar annual loss. With many lenders still freezing HELOCs in California, you could consider this “loss” as your investment to secure your liquidity. For individuals who absolutely need access to this cash, this loss could be a well spent investment and protection against your lender.

Potential Credit Affects: Utilization Debt to Available Credit
One of the factors that make up your credit score is based on how much of your available credit you use. If you max out your HELOC and stash the cash away, your credit report will show you that you’ve used 100% of your home equity line of credit. The ding to your credit will vary depending on your other accounts, but the loss should be considered. In a market where credit is examined so closely, suffering this penalty could cost you in other areas in the future.

Assessing Your Risk
Before jumping into any decisions, you should assess your risk to see how vulnerable you are to potential freezes in your mortgage. Most lenders will freeze these credit lines based on price drops in your surrounding area, with many justifying this freezes if your available equity drops by 50%. In the Bay Area for example, 90% of all zip codes have suffered a price drop recently, with drops ranging anywhere from 10-30 percent. Given the widespread drop in value across California, a 50% reduction in available equity is not too difficult after considering the total of your existing mortgages.

Take a look at your neighborhood areas and analyze some of the recent comparable sales. An appraiser charges anywhere from $350 to $500, so you may want to hold off until you actually need an appraisal. For example, if a lender does freeze your HELOC, hiring an appraiser would be the best method to protest any reductions in your home’s value. Also, don’t forget to contact your existing lender to find out if they plan on making any changes to their existing loans and on what basis they will be doing so.

So, is this dangerous advice? Well given the circumstances and the trend of recent lenders, it’s still a little strange for most people. If you really need the cash and can justify some of these mentioned warnings, it may be worth a shot. If you have any input on this advice, I’d like to hear your opinions in the comments section.