The mortgage crisis and subsequent tightening of credit by lenders has made tapping home equity more challenging. People who took out a home equity line of credit (HELOC) before the crisis occurred have been thanking their lucky stars that they still have access to funds, especially if they lost their jobs, had emergency medical expenses, or experienced a reduction in the value of their portfolios. Unfortunately, some banks started to freeze those credit lines, making that last lifeline unavailable to those who needed it most.
One woman, Mary Yakas, didn't sit back when Chase Manhattan Bank suspended her HELOC. She took them to court, alleging breach of contract, and the case is still in the court system. You may not have the money and energy to tell it to the judge, but you can take the following steps to make sure that your HELOC remains intact.
Know your HELOC
A HELOC is a line of credit taken against the equity in your home. Banks will generally allow you take an adjustable-rate line of credit of up to 80 percent of your home's outstanding equity. You generally can pay interest only on the amount you withdraw during an agreed-upon period, usually 10 to 15 years.
All terms are written into the contract. Banks can't arbitrarily freeze your line of credit, but they do retain that option if certain conditions occur. Generally speaking, they can freeze your HELOC if:
- The equity in your home is reduced by 50 percent from the time you took out your loan
- You're delinquent in your monthly payments
- A significant change occurs in your financial circumstances
Actions speak, so take them
The bank must give you written notice if they freeze or reduce your credit line no later than three days after it occurs. Once you receive the notice:
1. Carefully read it for information regarding changes in your HELOC.
2. Call your lender to find out why they froze or reduced your credit line. You may have made home improvements that the bank isn't aware of that could affect the value of your home on the upside. Or there may have been changes to your credit report that you're not aware of.
3. Ask your lender what steps you can take to have it reinstated. Put your request in writing. Once they receive your letter, they must investigate the reasons that led to their decision, and reevaluate whether it can be reinstated.
4. Find out if there will be any fees to return your HELOC to its original terms. They may require you to get a new credit report or appraisal to back up your claim that your home value hasn't dropped as much as they say it has. That, however, can be costly. On a positive note, your lender is not allowed to charge you a fee to reinstate your line of credit once the condition that led to their actions no longer exists.
It's not necessary to take your lender to court, but it is necessary to call them and take the necessary steps to make sure your HELOC is there, just in case you need it.