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Don't Panic If Your Home Equity Line
Of Credit Has Been Frozen
Because of falling housing values—and banks
trying to limit exposure to future losses—some banks are temporarily
freezing or limiting existing home equity lines of credit (HELOC). Of
course, that doesn’t mean it’s across the board; your line of credit may
be fine. However, it is a good idea to check with your lender to see if
your line of credit has been affected. If it turns out that your line of
credit is temporarily frozen or the amount you can tap into has been
limited, you do have options.
Make a
formal appeal to your lender.
Since most freezes and limitations are not being instituted on a
case-by-case basis, most lenders will allow you to appeal. If you do
decide to appeal, ask your lender why your equity line of credit was
frozen. In response, arm yourself with information such as your credit
score, loan-to-value ratio, debt-to-income ratio, and—most importantly—a
recent home appraisal. Getting a home appraisal may cost you a few
hundred dollars, but if you’re arguing that you still have plenty of
equity in your home, you’ll need an appraisal to verify that your home’s
value hasn’t dropped as much as other homes in your area.
Consider refinancing to a fixed-rate
mortgage. Although it isn’t a direct solution to a frozen or limited
equity line of credit, refinancing your first and second mortgage into a
new first mortgage at a fixed-rate can help you financially. By
refinancing both mortgages into a single mortgage (at today’s low
interest rates), you can lower your monthly payments and, in turn, not
have to tap into your home equity. Of course, in order to refinance
you’ll need to have good credit and you’ll need to qualify for the new
mortgage. When you talk with your lender, see if this option is
available and if it makes sense in your particular case.
Start building up your savings. If
your line of credit is for emergencies only, now is a very good time to
start building up your savings in other areas. If you can start putting
money (on a regular basis) into an interest-bearing bank account—such as
a money market account—you’ll be able to maintain your emergency fund.
Plus, instead of paying interest on your home equity line of credit,
you’ll actually be making interest on your savings. It may take some
time to build up your funds, but it is an excellent alternative for
emergencies.
In the end, you
shouldn’t panic if your bank sends you a letter informing you that your
HELOC has been frozen or limited. You do have other options in both the
short term and long term. Also, keep in mind that home values will
indeed eventually improve—and with improvement will come an increase in
equity. ∆ |
