HELOC Freezes Give Parents the Chill
In the past few months, largely in response to the credit crunch precipitated by the subprime mortgage crisis, some homeowners have been receiving letters from their lenders indicating that their home equity lines of credit have been frozen. In some cases, these freezes may be the result of missed payments (even missed payments on other debts) or declining home values in the area, but that’s not always the case. Many freezes are happening to homeowners with homes that have not declined in value, and who have impeccable payment histories and credit records.
If you have a HELOC and are planning to use it, perhaps to finance home repairs or to pay upcoming college tuition bills (two of the big reasons homeowners take out HELOCs), such a freeze could jeopardize your plans, forcing you to seek alternatives.
If you haven’t yet been frozen out of access to your credit (but are afraid you may be soon), you may want to withdraw a lump sum now, while you still can. Bear in mind that doing so means you will incur interest charges and repayment obligations earlier than you expected (and may, by increasing your current-balance-to-loan-limit ratio, affect your credit score in the process). And, because your residence is the collateral for a HELOC, the decision to withdraw is not one you should make lightly.
If you have already had your HELOC frozen, you can argue for a thaw. The letter you received announcing the freeze should indicate the reason for your lender’s decision. If a declining home value is the issue, ask a real estate agent to do a Comparative Market Analysis (CMA) or pay for a new home appraisal. If you can establish that your property has not declined in value, your lender may lift the freeze. If necessary, you can ask the lender for a lower credit limit, thus reducing the lender’s perceived risk while gaining some potential access to funds.