When Can a Bank Freeze a Home Equity Line of Credit Account?
Bank home equity lines of credit are mortgage products that must comply with mortgage laws in the state where the loan originated. Laws vary from state to state, but most HELOC contracts have provisions that allow the lender to reduce or freeze the equity line in certain situations. A change in the borrower's financial situation, or a reduction in the value of the home attached to the HELOC, are the circumstances that normally lead to the freezing of HELOCs.
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How HELOCs Work
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Banks that write HELOCs establish a revolving line of credit, secured by the available equity in the borrower's home. If the borrower defaults on the HELOC, the bank can foreclose on the home. People can use HELOCs repeatedly over the course of the loan term. Banks send customers monthly statements that require interest-only payments, although borrowers can pay off the whole line amount at any time but keep the credit line active. Most HELOCs have variable interest rates that are based on the U.S. prime rate.
Home Price Reduction
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During the recession that began in late 2007, home prices in some parts of the U.S. began to fall. Some people took out HELOCs that were equal to 100 percent of the value of their home prior to the market downturn. If people with 100 percent loan-to-value HELOCs default on loans, banks cannot recoup lost money by selling the home if the home value has fallen. Many banks freeze HELOCs tied to depreciating homes to prevent borrowers from increasing the balances.
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Financial Circumstances Change
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People who lose their jobs often struggle to pay their bills because they do not have sufficient alternate sources of income to cover their monthly expenses. Most HELOC contracts enable banks to freeze HELOCs when borrowers make late payments or miss monthly payments altogether. Additionally, some banks freeze HELOCs based on information provided by credit bureaus about borrowers delinquent payments on other credit products. Some banks offer credit insurance to cover payments on HELOCs during periods of unemployment but they may freeze the line to prevent further usage.
Preventing a HELOC Freeze
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Generally, banks base home price-related HELOC freezes on the overall performance of the surrounding real estate market rather than examining the value of a particular home. People can pay to have an appraiser evaluate their home and prove that it has retained its value. Lenders may require borrowers to hire bank approved appraisers before accepting these values and reinstating the HELOC. People whose credit caused the line freeze can bolster their FICO score by settling delinquent debts. Banks may charge a fee to reinstate frozen lines but must do so if the borrower requests it in writing and can prove that the freeze was unwarranted.
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