Answers about Home Equity Lines of Credit and Home Equity Loans
Select from the following questions about home equity lines of credit and home equity loans.
- What is a Home Equity Line of Credit (HELOC)?
- I just received a letter from my bank advising me that they have frozen or reduced the amount of my Home Equity Line of Credit (HELOC). The letter explained that the action was taken because the value of my home had declined. Is that legal?
- I agree that the value of my home has declined but I do not think that it was a significant decline. Does the law define what constitutes a significant decline?
- I received a letter from my bank stating that they have frozen or reduced my Home Equity Line of Credit (HELOC). I have already written checks using that line of credit but the checks are still outstanding. What can I do?
- The bank reduced my Home Equity Line of Credit (HELOC) before they contacted me. Does the law require them to notify me before they reduce the credit line?
- My Home Equity Line of Credit (HELOC) was reduced or frozen. I understand that the value of my home declined but so have many other homes in my area. It certainly did not justify the reduction in my credit line. What can I do to have the credit line reinstated? Or what can I do to appeal the decision?
- The bank told me that I could no longer get advances from reduced my Home Equity Line of Credit (HELOC) because the value of my home declined. The notice I received from the bank stated that I could appeal the decision by obtaining an updated appraisal. The bank indicated that I would have to pay for that appraisal. I do not think this is right. What can I do? Can the bank require me to pay for the appraisal?
- The bank just reduced my Home Equity Line of Credit (HELOC) so that it is equal to the amount I have already borrowed. The balance of my account is just below the new credit limit. I am worried that if they reduce the limit any further that it may raise effect my payment. Is this it possible for this to happen?
- What is a home equity loan?
What is a Home Equity Line of Credit (HELOC)?
A HELOC is an open-end line of credit that generally is secured by a consumer’s primary residence. There may be different ways to access the funds from a HELOC, including by writing checks against the line of credit or transferring money from your HELOC to a checking or savings account.
I just received a letter from my bank advising me that they have frozen or reduced the amount of my Home Equity Line of Credit (HELOC). The letter explained that the action was taken because the value of my home had declined. Is that legal?
Federal law permits the bank to reduce the credit limit on your HELOC or to freeze your account and stop additional extensions of credit in certain specified situations, including if there has been a “significant decline” in the value of the property securing your loan since the HELOC was approved.
I agree that the value of my home has declined but I do not think that it was a significant decline. Does the law define what constitutes a significant decline?
Under federal law, what constitutes a significant decline will vary according to individual circumstances. The general rule of thumb is that if the value of the home declines so that the initial difference between the credit limit and the available equity when the HELOC was approved is reduced by 50 percent, the decline is "significant."
Here is an example:
Assume the home has an appraised value of: $100,000
First mortgage on the property in the amount of: $50,000
HELOC on the property in the amount of: $30,000
The difference between the appraised value and both loans when the HELOC was approved is: $20,000
50% of the difference is: x 0.5/$10,000
For this example, a decline of $10,000 in the appraised value of the property from $100,000 to $90,000 would be considered significant and the bank could prohibit further advances or reduce the credit limit. Your bank may need to evaluate smaller declines in the property value on the basis of the specific circumstances to determine whether the decline is "significant."
I received a letter from my bank stating that they have frozen or reduced my Home Equity Line of Credit (HELOC). I have already written checks using that line of credit but the checks are still outstanding. What can I do?
You should contact your bank immediately and discuss the outstanding checks.
The bank reduced my Home Equity Line of Credit (HELOC) before they contacted me. Does the law require them to notify me before they reduce the credit line?
No, advance notice is not required. If the creditor is permitted to reduce or "freeze" a HELOC, it must provide written notice within three business days of taking the action. The notice must provide the specific reason(s) for the action. Also, if the bank requires the customer to request reinstatement of the original credit line because of changed circumstances, then the notice also must provide instructions on how to request reinstatement of credit privileges.
My Home Equity Line of Credit (HELOC) was reduced or frozen. What can I do to have the credit line reinstated? What can I do to appeal the decision?
Federal law provides two options. The first is, the lender can require you to request reinstatement of your original credit line when the circumstances permitting the reduction or freeze have changed, so long as it informs you how to request such reinstatement. If your bank notified you of the process for requesting reinstatement of your credit line, you should follow that process. If you are uncertain about the information your bank requires, you should contact the bank. However, be prepared for the bank's requirement for an updated appraisal at your cost.
The second option is the lender can monitor the HELOC on an ongoing basis to determine whether the circumstances permitting the reduction or suspension continue to exist. If the bank is monitoring the HELOC, you do not have to request reinstatement of the original credit line.
The bank told me that I could no longer get advances from my Home Equity Line of Credit (HELOC) because the value of my home declined. The notice I received from the bank stated that I could appeal the decision by obtaining an updated appraisal. The bank indicated that I would have to pay for that appraisal. Can the bank require me to pay for the appraisal?
Yes. Federal law permits lenders to collect bona fide and reasonable appraisal fees (and credit report fees if applicable) if such fees are actually incurred during a review of whether the condition triggering the reduction or suspension of the HELOC continues to exist. Please keep in mind that an updated appraisal may not lead to a favorable decision.
The bank just reduced my Home Equity Line of Credit (HELOC) so that it is equal to the amount I have already borrowed. I am worried that if they reduce the limit any further that it may raise my payment. Is this possible?
No. Federal law prohibits the bank from decreasing your HELOC to an amount below your current balance if it would raise your required payment.
For example, assume that a HELOC originally was approved for $10,000 and the consumer has borrowed $5,000. If federal law permits the lender to reduce the credit limit, it could not set the new credit limit below $5,000 unless the consumer's required payments stayed the same.
What is a home equity loan?
A home equity loan allows you to tap into your home's built-up equity, which is the difference between the amount that your home could be sold for and the amount that you still owe.
Homeowners often use a home-equity loan for home improvements, to pay for a new car, or to finance their child's college education. The interest paid is usually tax-deductible.
Because the loan is secured by your home's equity, if you default, the bank may foreclose on your house and take ownership of it.
This type of loan is sometimes referred to as a second mortgage or borrowing against your home.
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