No More Line of Credit for You!

Homeowners who are depending on the money for serious financial commitments such as renovations, college tuitions or medical expenses, may have to consider alternative sources to meet short-term cash-flow needs, says Shanda Jeffries, director of corporate services for ASE Wealth Advisors in Greenville, S.C.

Those options, however, may not be as favorable as a home-equity line of credit. For example, borrowers may need to tap into their 401(k) plans in a worst-case scenario, she says. But if you don't pay it back, a 10% early withdrawal penalty applies to the loan balance, plus state and federal income taxes for that year. "You really have to talk to a financial adviser if you're having a serious cash-flow problem," she says.

Appleman, who has been cooking in a microwave and storing perishables in a mini refrigerator, says he was ultimately able to arrange a $60,000 unsecured loan through Bank of America -- after explaining his problem to at least five different bank representatives. But the interest rate soared from 5.9% for the equity line to 8.9% for the unsecured loan -- and the interest on the latter isn't tax deductible. "It gets me out of the problem for now," he says.

Don't expect banks to automatically reverse course if real-estate values ultimately notch upward. Bank of America, at least, has no intention of automatically reinstating borrowers' previous credit lines if appraisal values increase, says Francisco. It's the buyer's responsibility to contact the bank, he says.