Understanding Changes to Your Home Equity Line of Credit

If you just opened a letter from a lender informing you that your home equity line of credit (HELOC) has been reduced or frozen – you may have some questions about what is going on. A home equity line freeze or reduction means that your lending institution has identified a reason to reduce the credit limit on your current line of credit. Your lender must send you notice within three days after a reduction has been made.

Know the difference between a HELOC freeze and a HELOC reduction

Though both affect your borrowing power, there are differences between a HELOC freeze and a HELOC reduction. Understanding them can help you to better understand what is going on with your account.

  • HELOC freeze: Upon notice of a HELOC freeze you can no longer draw on any of the funds that were previously available to you through your home equity line of credit. Your line is literally frozen where it is at the time the determination is made.
  • HELOC reduction: A HELOC reduction doesn’t necessarily mean that you are restricted from borrowing more from your home equity line of credit. It does mean, however, that the total amount you can borrow has been lowered based on the existing level of equity in your home.

Factors influencing a HELOC freeze or reduction

Before you can move forward and start looking at your options, you should make sure you understand the reasons a HELOC freeze or reduction can be put into place. Both are most commonly the result of one or a combination of these factors:

  • A change in home value: Since your home equity line of credit is directly related to the value of your home, when that value falls, your borrowing power can as well. In this circumstance you will either see a HELOC freeze or a reduction depending on how much the value has declined. It is not in the best interest for you or your financial institution if you owe more on your line of credit than you have accumulated in equity on your home. So, if the value of your home falls to the point that you are in a situation of negative equity, you will most likely see a HELOC freeze.
  • A change in borrowing status: Since your home equity line of credit was granted based on your qualification as a borrower, your lender can also continue to examine your ability to make payments. If at any time your lender has reasonable doubt in your ability to continue to make payments, they can reduce or freeze your credit line. So, if you have just gone through a divorce or lost your job, you may receive notice of a change in the terms of your home equity line of credit.
  • A decline in credit rating: If you have consistently made payments, but are still going through a HELOC freeze or HELOC reduction, your credit may be to blame. If there is a significant drop in your credit score, you may represent a larger risk to your lender and see a reduction in the amount you can borrow.

What you can do if a HELOC freeze or reduction is placed on your account

If you feel that there was an error or oversight made while determining the change in your borrowing status, or you address the reason for the HELOC change, you can make an appeal to your lender.  So, if you’ve made significant improvements to your home or received an increase in pay, you may have options. Talk to your lender directly and see if there is anything you can do. Once the condition that caused the HELOC freeze or HELOC reduction has been reversed, the lender should reinstate your borrowing power.

Remember, you still have responsibilities to the bank during a home equity line freeze

Even if your borrowing power has changed, your responsibility to the bank has not. If you don’t want to see your credit score negatively affected by a HELOC freeze or reduction you have to continue making payments on your account.

Sponsored content was created and provided by RBS Citizens Financial Group.

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