How I Unfroze My HELOC — OR I Fought the Bank and the…Bank Lost!
Posted by Thirtysomething Finance on December 7, 2009
In case you’ve been living under a rock (not The Rock), the real estate market has sort of been in the toilet for the last 2 years and change. It’s unclear whether I’m screwed as a result in terms of dropping home values — as I will discuss herein, within the past 8 months, my place appraised at $45,000 and $20,000 more than I paid for it…yes, I got two appraisals and will explain why — but at one point, when my bank tried to screw me, I fought back and prevailed!
For background, I closed on a brand new condo in March 2007 (great timing, eh?). I paid $415,000 for it, plus some upgrades for about another $7,500 — nicer hardwood floor, nicer sink in one of the bathrooms, etc. I actually caught a break too — long story short, through a clerical error on the part of the seller’s real estate agent (which the developer decided to honor), combined with a little haggling on the part of my real estate agent (a.k.a., my Mom), I ultimately paid almost $60,000 less than what the developer was initially asking! My building has 4 floors of residential units. The second and third floors are single level units, while the third and fourth floors consist of lofts. I live in the smallest unit on the fourth floor — that is, the least expensive and highest loft unit.
Important Note: units on the third and fourth floors are identical, and by and large, are priced at exactly $20,000 less than units on the fourth floor — and the unit immediately below mine (my sister unit on the third floor) sold for about $452,250. So aside from the fact that I completely love my place, this also made sense to me from an investment point of view.
Anyway, in order to finance my purchase, I made a downpayment of 5% — that is, $20,750 — and took out a 30-year fixed mortgage for $325,000 at a rate of 5.875% (I locked in this rate some time in 2006 and paid one point — an extra $3,250 — up front to get this lower rate) and a HELOC for the remainder ($62,250). For those who don’t know, “HELOC” stands for Home Equity Line of Credit. Basically, it functions like a bank account whose limit is a certain amount of equity in one’s residence. It’s kind of like a second mortgage, except you can draw down on whatever amount you’ve repaid at any given time — so if you draw down the full amount, then repay half, you still have access to half. Make sense? More information here.
So in my case, based on the appraised value of my place, my bank let me borrow $62,250 from them, with this amount being secured by the value of my home. I then used the full amount to help finance the purchase of my place — another long story short, this was a good move because it permitted me to get around PMI (purchase money insurance).
So here I am, making monthly payments on my 30 year fixed mortgage and also on my HELOC. Both loans are secured by my home, but from the bank’s perspective, my home is only as good as what it’s worth. So the real estate market tanks, and in January 2009, I get a letter from my bank telling me that my home (which I bought in March 2006 for $415,000 and which, according to my bank, had appraised at that time for $440,000) had an estimated value of $350,000 — a drop of $90,000, according to their appraisals! Thus, because my HELOC lender was afraid that the loans on my place were greater than what my place was worth (i.e., that I was underwater), the bank told me it was “suspending future draws against [my] account as of January 20, 2009.” In other words, my HELOC effectively became a run of the mill loan that I had to repay and whose balance would only decrease.
I was shocked! I was appalled!! I was outraged!!! After all, I bought my place for $415,000, had put in about $7,500 worth of upgrades off the bat (sink, hardwood floor, etc.), and between March 2006 and January 2009, I calculated that I’d put in another $17,000 or so in various improvements. So my place had to be worth at least $440,000, which was $25,000 more than I paid for it, right? OR if you were to use $440,000 as a starting point (remember, that’s where my bank said it appraised my unit at in March 2006, then it would be worth $465,000, right?? OR if you were to compare my unit to my sister unit on the third floor, which sold for $452,250 and add $20,000 off the bat (remember that units on the fourth floor sell for that much more than units on the third floor), plus the $25,000 in improvements, we’re looking at almost $500,000, right??? Well, my bank didn’t think so.
But regardless, so what? I’d already drawn down the full $62,250, and they weren’t making me pay that back immediately, so I was OK, right? Well, not exactly…
You see, after buying my place, I was trying to be a good boy and was socking away money each month to start an emergency fund…but rather than put this money into a high interest-bearing savings account, which is where I keep my savings now, I had been paying down my HELOC, assuming I would be able to withdraw this money in the event of an emergency. By the time January 2009 rolled around, I’d saved about $7,500, and while I knew that banks were starting to freeze HELOCs, I just didn’t think home values in my city had been as affected by the subprime crisis as other areas had. Well, it was looking like I was wrong!
So what was I to do? Well, in the letter the bank sent me, there were instructions for how to appeal the bank’s decision to freeze my HELOC — I had to obtain my own appraisal putting the value of my home at $440,000 and had to submit it in accordance with the terms of the bank’s letter. So my first step was to obtain an appraisal, and you can be sure I had the name and number of an appraiser within the course of a week, and after a few months worth of back and forth, including E-Mails about the upgrades I’d made, real estate comps, and the market in general, I had an appraisal in hand reflecting an appraised value of…
…wait for it…
$460,000!!!!! Appreciation of $20,000 over the bank’s appraisal in March 2006 and $45,000 compared to my purchase price!!! Well, you can be sure I put together a very lawyerly package for the bank and had it out to them the day after I got the appraisal in. And lo and behold, they unfroze my HELOC!!
The only thing that was troubling me was that I had to pay $360 for the appraisal, and you know, if you think about it, it’s really not fair that I should be out of pocket that much money when the bank clearly goofed in its appraisal. And as I’ve told you before, Bub always taught me that the answer is always “no” if you don’t ask. So I added to my lawyerly package that I thought I should also be reimbursed this $360 — and the bank reimbursed me!
Well, I’m no dummy (most of the time, anyway), so I immediately drew down the full amount in my HELOC (about $7,500) and put it into my high interest-bearing savings account (at the time, I was using HSBC, but I later switched to Schwab). Since then, I’ve upped my emergency fund to $15,000.
So in the end, I fought the Bank and the…Bank lost! I think the lesson here is that you really need to stand up for what you believe in and vigorously defend your personal finances! I’m not sure if banks are still freezing HELOCs, but if anybody is facing this issue, I’m glad to help guide you through the process.
And as if this story weren’t sweet enough, there is a beautiful silver lining that drips with poetic justice (not Poetic Justice). But I’m exhausted, so I’ll have to fill you in on that later. Thanks for reading this far!