We came across this post about Possible Dangers in Home Equity Loans which puts an interesting twist on the potential emerging “perfect storm” of high HELOC utilization, rising interest rates, and dropping home prices.

For borrowers, the combination of these factors is a recipe for major financial stress. Add in two more factors and the potential for a real calamity becomes clear:

1. many mortgages and home equity loans - especially those processed during the housing boom - are based on inflated appraisals, meaning some of the borrowed equity never really existed; and

2. “home equity” is the main retirement savings account for milions of Americans, accounting for 1/3 to 1/2 of the average baby-boomer’s total wealth.

So, where’s the silver lining in this cloud? Well, mortgage pros are eyeing another round of refinancings (this time not to buy a 60″ flat screen but to save the homestead) and the windfall in fees and closing costs that will acompany the rush:

This type of build-up of financial burdens on homeowners brings about a perfect opportunity to cash in on the increasing need to refinance to keep their mortgage payments under control. According to Brad Brunts, with Citi Mortgage, these changes will bring him more business, “It offers an opportunity.”

Strange how things work.

HELOC loans remain a viable and extremely useful personal finance tool if used prudently. But, unfortunately for many borrowers who weren’t careful, a painful reckoning may be coming.

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