In the time of the Great Depression, many mortgages were written with a provision that allowed banks to call in the loan at any time. As they began to stumble towards failure, they frantically called loans and foreclosed on properties right and left. According to Dave Ramsey, mortgage laws have changed since those days. This was to prevent such a ruinous cascade of events taking out both the lenders and the borrowers in an “every-man-for-himself” race to survive at the expense of everyone else. However, there are still some sub-categories of loans that remain subject to such provisions– albeit in a backdoor fashion.
The Back Door Callable Mortgage
Of most interest to the general public are the terms that can be included in so-called HELOCs, or Home Equity Lines of Credit. These are financial instruments wherein you pledge the remaining value of the house over and above that of your existing mortgage in return for the right to draw upon that sum whenever you like by simply writing a check.
Protecting the Banks
There are two major dangers with such a loan. First, it is based upon the value of the home minus the mortgage held against it. In the event of a housing market crash, that difference between the two can be effectively wiped out by a fall in value of the underlying asset (your home) that serves as collateral. Secondly, it is also based upon your ability to repay the note. If you lose your job, or your second-income spouse dies, you may no longer qualify for the line of credit you have already received.
But Not You
In these instances, banks have been known to freeze the line of credit without notice– meaning that you cannot access any more of the funds than you have already drawn out. Next, they may decline to roll the HELOC over once it does come due. This arbitrary power of the banks can create an immediate problem because there are some HELOCs which are written with annual renewal clauses in them. In other words, some types of HELOC’s can be called due at the option of the lender regardless of whether you have been making your payments on time. In most cases, that effectively wipes out the homeowner and leads to the loss of all their accumulated equity.
Put simply, if a bank decides that your relationship with them is more of a liability than an asset, they can mess you over very quickly. According to CNBC, 78 percent of full-time workers are living paycheck to paycheck. This means that for a vast majority of us, we’re one cash flow disruption away from financial disaster. This might be why hundreds of thousands of Chapter 13 petitions are filed every year. If you have exposed yourself to these types of risky loans, are highly leveraged, with minimal emergency savings, you could be setting yourself up for some very stressful times in your near future.
Your Best Bet is to Go With a Trusted Credit Union
Unlike big national banks, credit unions are non-profit entities who operate to maximize the value for their members. At a credit union, you are not just a customer; you’re a stakeholder. While credit unions and banks operate under similar federal regulations and provide similar services, a bank’s priority is their bottom line, not necessarily your bottom line. Not every bank is scummy, but on average a credit union is going to work with you more and treat you better.
The best method for finding financial peace is to get out of debt and stay out of debt. 2nd Mortgages, HELOC’s, Title Loans, and unsecured notes are not tools for your prosperity – they’re ticking timebombs. Don’t sabotage your financial future. Escape debt, build wealth, and use it to make a difference in your community. You can do it!