The fallout from the slumping real estate market has taken a new twist as thousands of U.S. homeowners have seen their home equity line of credit either cut or frozen by their bank without warning. The kicker is it’s all completely legal.
Homeowners across America who may have planned to access their home equity lines to pay anything from college tuition to home improvements are being put in a quandary.
Home equity lines are usually revolving credit, which allows borrowers to draw money based on the equity in their home. However, unlike mortgages home equity lines give the bank or mortgage company the right to adjust the loan amount available at anytime.
This can happen to any borrower, regardless of whether you have good credit and make your loan payments on time. It has more to do with the falling values of homes throughout the real estate market.
If you or someone you know received a letter from a lender stating a change in your home equity line of credit, the Federal Reserve has suggested, on its website, following the 5 below tips:
1. Read the notice your lender sends you.
Your home equity line of credit (HELOC) lender must provide you a written notice if they have frozen or reduced your HELOC. Your lender must send the notice to you no later than 3 business days after the freeze or reduction. The notice also must include information about any other changes to your HELOC.
2. Call your lender.
Even if you have a good payment record, if your home’s value has fallen, your lender may freeze or reduce your HELOC. Contact your lender if you have questions or concerns about a freeze or reduction.
3. Learn why your lender froze or reduced your HELOC.
A freeze or reduction notice should include specific reasons for the action. The most common reasons for a HELOC freeze or reduction are a decline in the value of your home, or a change in your financial circumstances.
Understanding your lender’s reasoning may help if you want to take steps to have your credit line reinstated to its original amount. For example, a lender may not be aware that you made significant home improvements that increased your home’s value.
4. Ask your lender how to have your HELOC reinstated.
Your lender must reinstate your credit privileges when the conditions permitting the freeze or reduction no longer exist. You may need to put in writing your request to have your line of credit reinstated. Once your lender receives your written request, they must promptly investigate and determine whether your HELOC can be reinstated.
5. Remember that your lender can impose fees for reinstating your HELOC.
Your lender may charge you fees to cover the costs for an appraisal and credit report when they consider your request for reinstating your HELOC. Your lender cannot, however, charge you a fee to reinstate your credit line once the condition that caused them to freeze or reduce your HELOC no longer exists.