Most home equity line of credit (HELOC) agreements give the bank the right to close the credit line when it suspects the borrower can no longer afford the loan. Such a move is possible if a spouse dies and if the spouse was a signer on the loan and provided income to support the payments. The death is unlikely to effect the HELOC in situations in which the surviving spouse is solely responsible for the loan.
The Federal Reserve Board reports that most HELOCs contain clauses allowing the bank to freeze or reduce a credit line if the lender "reasonably believes" that the account holder is unable to make payments because of a "material change" in finances. That could mean losing the income of a spouse. To gain the most protection, the bank will close the credit line or freeze it at its current balance. No further charges are allowed if the credit line is closed, while freezing the line allows additional charges as the balance is paid down.
There usually is little recourse if the bank exercises its right to close the credit line. The surviving spouse can make a case for keeping the account open based on information the bank may not have, such as increased wealth because of payouts from life insurance companies. The bank may require an updated loan application based entirely on the surviving spouse's income and assets.
The Federal Reserve Board also recommends shopping around at other banks for a line of credit to replace the HELOC if the bank declines to restore the line of credit or issue a new loan based on the financial qualifications of the surviving spouse. The new HELOC will pay off the existing loan if there is a balance and provide the surviving spouse with a new credit line.
Bankrate suggests seeking legal advice from an attorney after the spouse's death. The attorney may advise that it is proper to notify the bank of the death. Some people may assume that nothing may change if the bank is not notified of the death and payments on the HELOC are made on time. That is a possibility, but the safer strategy often is to notify the bank of the spouse's death if the spouse was a signer on the loan. Taking some time to discuss the death with an attorney and perhaps a financial adviser allows for presenting the bank with a plan for keeping the account open.
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