Pros and cons of home-equity loans

Many homeowners who have taken out home-equity lines of credit have learned in recent months that these loans are not as useful as they initially seemed.

Lenders are struggling to minimize risk, and because they are especially at risk to lose money on residential real-estate loans, they are cutting back on homeowners' credit lines or freezing them.

Many people who took out home-equity credit lines of $100,000 on their home and used only, say, $20,000 have received letters informing them they can no longer borrow additional money, just as their stock portfolios are dwindling.

The banks' reasoning, typically, is that property values are dropping, so the equity does not actually exist.

To challenge the bank's valuation of a home, a homeowner has little recourse but to spend his or her own money to order an appraisal — a potentially costly and futile approach.

But a new countermeasure is emerging: take out the money before the bank puts it out of reach.

In this strategy, borrowers draw the maximum amount even if they don't need it, then place the cash in a liquid, and safe, investment vehicle.

There are some risks with this approach.

First, if the value of a home drops significantly and the borrowers have spent the cash from their equity line, they can end up owing more money than their property is worth. (In industry parlance, the borrower is then "under water" or "upside down.")

The prospect of easy money also is a temptation that some borrowers will find difficult to resist.

But for those with enough self-restraint not to spend more than they need, withdrawing the full credit line may be easier than having a credit line rescinded and then finding another bank.