One of my new favorite web sites is http://ml-implode.com. The owner of that site has been tracking mortgage companies that have gone out of business and has assembled a fantastic collection of articles and information on the fall-out of the sub-prime market collapse.
Yesterday when I checked the site 167 companies had gone out of business. Today, while writing this article I checked again and the number was up to 170!
I recently came face to face with one of the unanticipated side-effects of the mortgage meltdown. Richard and I have made it one of our investing strategies to take out lines of credit on our properties and to use those lines of credit as necessary. But not too long ago we got a call from one of the now-defunct mortgage companies who held one of our loans, asking us if we were interested in converting from a short-term, adjustable loan to a long-term fixed loan (at a much higher rate!). We declined, but then learned that our line of credit on that house had been frozen.
That freeze isn’t a problem for us, but what if someone was depending on that line of credit to get them through the tough times? I know that not everyone is in the same financial place. Many people have told me that while they are trying to fill their Emergency and Security financial buckets, they are still hanging onto that line of credit as a last-gasp measure. So, should you draw down your line of credit “just in case?”
That depends (yes, I know … but it’s true!). If you draw down on your line of credit you’ll have payments and interest to make each month. Chances are you won’t be able to stash that money in an income-bearing account that will cancel out the interest you’ll pay, so you will go negative each month. Plus, if the value of the property goes down, you may wind up in a negative equity situation, where you owe more than the property is worth. The right answer will be different for everyone, but those are two things I’d take a long, hard look at before you make a decision to pull on your line of credit “just in case.”