The mortgage market has grown leaps and bounds from the days when the 30 year mortgage was the primary loan available. That doesn’t mean that all the new products are good for homeowners.

As the real estate market has cooled off, the big lenders are starting to report a predictable thing. Yep, loans are going into default. HSBC, a huge lender, just reported it has over 10.5 BILLION in bad loans. That is a staggering number. Why is this happening? Well, people thought the real estate market would never cool down. Now that it is, they are upside down on their homes. By upside down, I mean they owe more than the home is worth.

One area where people have gotten into trouble has to do with their use of home equity credit lines. Known as HELOCs, these are credit lines written off of the value of the equity in a property. If your home is worth $100,000 more than you owe, a lender will give you a line of credit. Typically, the line of credit does not exceed 80 percent of the total value of the home. At least, that is the way it used to be.

Many homeowners were consumed with glee during the recent raging real estate market. The good times would never end, or so they thought. As we all know, those days are over. Frankly, everyone should have seen it coming given the fact real estate has never historically appreciated at the rates we saw in the early years of this decade. Regardless, there are a lot of people in trouble. One of the ways they got in trouble was taking out 125 percent home equity lines of credit.

The 125 in the loan title refers to the value the loan is based on. Whereas traditional equity credit lines capped out at 80 of the value of the home, these did not. A few lenders would give you 125 percent the value of your property. Yes, they would give you more than the home was worth. This is resulting in serious problems for many borrowers.

As the real estate market is cooling, many people are realizing they may have bit off more than they can chew. Even worse, they are realizing higher interest rates are resulting in payments they can’t make. The only solution is to sell the property, but they can’t. Why? They owe more than the home is worth! This is resulting in people being stuck between the proverbial rock and hard place.

Home equity should be used as a nest egg for important things such as remodeling or sending kids to college. Even then, you should be hesitant to take out a loan that results in your owing more than your home is worth.

Dan Lewis is with Great Western Mortgage - providing Sacramento home loans for bad credit borrowers.