For homeowners who have significant equity in their property, they have access to a powerful financial planning tool that can help them survive more serious financial crises and emergencies: the home equity line of credit (HELOC).

HELOCs are easy to set up and many homeowners with strong qualifications can sometimes get one for free from their local banks.

Unlike a home equity loan, however, you won’t have to make any payments with the home equity credit line — unless you use it.

That’s where it’s financial planning prowess comes to life. If you ever need to use it for a major emergency, you can just draw against it and have your cash within a day or two:

• Cheaper than credit cards. You may have credit cards for small emergencies, but revolving debts charge much higher interest rates.
• Tax deductible interest. Just as with home equity loans, the interest charges on HELOCs may be tax deductible.
• Faster than large loans. You could also apply for a refinance or loan against your 401K or other assets, but that will take time — and often incur more costs.
• Flexible draw. Instead of one lump sum, the HELOC gives you a credit line against which you can draw multiple times. So whether you need money to overhaul your car, rent a beach house for a month or invest in a special property, you can have ready access to cash when you need it.

So if you’re in the financial planning mode this weekend, don’t forget to consider your property and the home equity credit line. If you have built up significant equity in your property, check with your local banker about a no-cost home equity line of credit and add another contingency resource to your long-term financial plans.

Nevertheless, if you’re rebuilding your credit for a long-term goal, then you should still pay off collections whenever and as fast as you can.

Here’s the problem with paying off collection accounts: they stay on your credit record even after you pay them off. Yes, they will show a zero balance, but the credit bureaus and credit scoring system still counts that entry as a collection account.

Paying it off will also make that collection account a fresh entry — rather than an old one.

In many ways, that is probably the biggest reason why paying off your old collection accounts may hurt you. FICO and other credit scoring systems give slightly more weigh to the most recent credit entries. So that old collection account becomes a recent report… of a collection account. Yes, it’s now a zero balance, but it’s still a collection account.

Fortunately, the pain is temporary. After six months or so, that collection will start fading away in strength, especially because it is now paid off.

Plus, you get extra credit if the collection is for a revolving account. Your history and balances on revolving accounts (i.e. credit cards) make up nearly a third of the scoring factors with FICO credit scoring systems. And in that big grouping is the calculation of revolving account balances divided by credit limits. By removing that credit card collection, you effectively lower your credit balance-to-limit ratio, which will give your score a boost after a few months.

For more information, check out the credit repair guides at CreditRehab411.com.

There are actually several programs available to help homeowners facing foreclosure to refinance or modify their mortgage loan out of their dilemma. But in just about every case (with the exception of maybe the reverse mortgage), much depends on the borrower’s income situation.

The fact is that if you don’t have the income to realistically pay back the mortgage loan, even after lowering the interest rate to 2%, extending the term to 40 years and forbearing a large part of the principal, then there’s no incentive for lenders to bother trying to work something out. You’ll just end up where you started.

For many homeowners in distress, especially with insufficient income to afford a modified or refinanced mortgage, a strategic foreclosure may not just be the best option. It may be the only option.

The Benefits of Strategic Foreclosure

A common theme expressed by many homeowners who have chosen a strategic foreclosure is the ability to finally get a good night’s sleep.

With a strategic foreclosure, you basically choose to abandon your mortgage. You stop paying, and you ignore the phone calls and letters from your mortgage lender. You accept the fact that there’s no way to salvage your mortgage… so why bother wasting money and energy even trying.

One of the greatest tragedies I’ve had the misfortune of witnessing was seeing good friends — against my advice — liquidate their 401Ks and savings in an attempt to save a home they just couldn’t afford. In the end, they were left with no home and no pension.

In the process of opting for a strategic foreclosure, you’ll suddenly realize the same benefits enjoyed by countless corporations who have decided to throw in the towel… so as to fight another day:

• Live rent free. Depending on the laws of the state in which the property is located, it may take two months or two years before you are finally required to move out of your home. During that whole time, you won’t have to worry about mortgage loan payments.  It usually takes most lender three to six months to finally bring most distressed borrowers to foreclosure court. And with the right moves, you can get several more months before you finally get an eviction notice from the sheriff’s office.
• Save your savings. During this period, you can use the money you would have been spending on your mortgage and use that for real necessities — as well as to start saving your money. Since you’ll probably need an apartment in a few months, it’s a good idea to start saving for the security deposit and initial rent.
• Start planning for the future. A foreclosure is one bump in the long road of your life. The key to recovery is to start looking to your future and planning for it.
• Breathe easier. Finally, without the crushing emotional and mental burden of dealing with a mortgage loan that you know, deep down, you cannot afford, deciding on a strategic foreclosure will allow you to start feeling normal again.

I won’t discuss the morality or ethics of a strategic foreclosure at this time. That will have to wait for another blog post. But suffice it to say that many of the lenders behind the foreclosure would willingly abandon their liabilities and declare bankruptcy if they were faced with a similar situation.

In fact, realistically accepting the facts, moving on and rebuilding is an integral part of America’s capitalist system.

Understand the Cost

At the same time, I don’t want to minimize the cost of a foreclosure.

Your credit will take a severe hit, and you won’t be able to qualify for a decent mortgage for at least three years. Fortunately, the damage to your credit of a foreclosure damage usually doesn’t last beyond seven years.

So is a strategic foreclosure the right option for you?

If you don’t have the income or resources to modify or refinance your loan to a realistically affordable level, it may be the only option.

I would actually suggest that if a mortgage lender fails to provide you with an honest good faith estimate at the time of application, that mortgage company or loan officer is probably one that you should avoid. But that’s for another blog post.

Rather, I want to focus on the money-saving opportunities that can be uncovered in the good faith estimate.

Let’s start with the Yield Spread Premium or YSP. This is the commission amount that the mortgage broker or loan officer will be receiving from the wholesale lender who will actually be providing the funds for the loan. The yield spread premium is typically about 1% to 1.5% of the loan amount, and should be expressed as both a percentage and actual dollar amount.

If you have a big loan amount, this commission will likewise be bigger for the loan officer. If that is the case, make sure to point this out to your mortgage lender and use the fact that you know this as leverage to lower other costs — especially their junk fees.

Don’t get me wrong. I firmly believe that mortgage professionals deserved to be paid for their services. But if they’re already being paid handsomely by the wholesale lender who’s buying the loan immediately upon closing, then they should probably give you a break on the silly junk fees too many mortgage brokers and loan officers add to your closing costs.

Another area of possible money savings is the credit report. Make sure to ask for an actual receipt from the credit reporting company. The reason is that some mortgage companies will estimate $50 for the credit report but will actually pay much less… then pocket the difference. By asking for a receipt before the closing or during the application, you can give them warning that you don’t want to overpay on your credit report charges.

Finally, don’t forget always ask for discounts on your closing costs. Mortgage companies are hungry for your business, especially if you’re a qualified borrower. Use that to your advantage to negotiate the best possible deal.

Loan modification and foreclosure refinance programs can be forgiving about your credit. They can also be flexible about the upside-down or underwater nature of your mortgage. But at the end of the day, if you cannot afford even the modified loan payments, a refinance just wouldn’t make sense.

This is why long-term unemployment continues to have such an outsized impact on our housing industry and the foreclosure crisis. The programs launched by federal and state governments to help homeowners in distress do little for families who must decide between food or the mortgage. In such cases, the right answer is a no brainer.

Unfortunately, even though the logic of income qualification is understandable, the truth is that our houses are more than just pieces of real estate. They are our homes, upon which we attach so much of our emotions and our selves.

Here’s a partial list of culprits:

• Lenders. In their quest to make more money, mortgage lenders realized they had to make more loans in an increasingly crowded marketplace in order to grow their bottom lines. Consequently, many began to loosen their underwriting standards in a dangerous race to the bottom.
• Speculators. In their quest to make more money, real estate investors and speculators went on a property buying spree. The madness drove up property prices to unsupportable and unrealistic levels, given average salaries and wages.
• Federal government. In its quest to keep the economy going despite fighting two wars and widespread job loss in the manufacturing sector — without raising revenue-generating taxes — the federal government turned to real estate to money flowing in the economy. It pressured Fannie Mae, Freddie Mac and the Treasury to take steps to ease credit, which ended up feeding the unsustainable prices of real estate.
• State regulators. In their quest to keep state coffers filled with revenue generated from real estate sales and transfers, many state regulators turned a blind eye to the overheating housing market in their metropolitan areas.
• Developers. In their quest to make more money, many developers abandoned conservative fiscal sense and continued to develop more land for more homes — even though the demand was clearly not sustainable.

The truth is that we all probably share in the blame.

Looking back, historians will probably be able to write with some objectivity that we closed our eyes to the cost of the war in Iraq and Afghanistan, and used the real estate and housing boom to finance an economy that had some major problems.

It’s not the first time this has happened. And it won’t be the last. But the way out will depend on us starting to confront issues honestly and courageously.