HELOC is a revolving credit line secured by borrowers’ property, which offers the borrower a flexibility of drawing it in part or as a whole as needed instead of one lump sum distribution, unlike other Home Loans.
HELOC loans have been a great option for borrowers as they offered high limits and low interest rates. However, nowadays thousands of borrowers are receiving HELOC freeze notices. When the bank freezes your HELOC, you are no longer able to draw the credit from your HELOC withdrawal limit.
The lender can freeze your HELOC if the amount of equity remaining in the home declines by half. The amount of remaining equity is calculated by taking the difference between the credit limit and the home value. Thus, the borrowers who have purchased houses in the areas where property value has sharply declined or those who have made lower down payments for purchasing their houses are more likely to face HELOC freeze.
The present day credit crunch has seriously affected the HELOC market. Since real estate values are continuously falling and unemployment is rising, the borrowers are losing their ability to repay their loans. A study reveals that almost 2% of all HELOC accounts had become dubious only in the first quarter of 2009. Before, in 2008 the declining trend in home values resulted in major HELOC lenders like Bank of America, National City Mortgage and Wells Fargo to restrain or even freeze their borrowers’ lines of credit. The recent HELOCs issued by JP Morgan Chase have fallen by 89% as house prices have fallen by 50% in some areas.
On one hand HELOC, by virtue of its lower interest rates and possible tax concessions, is becoming more popular with borrowers due to economic downturn and its ability to be used for debt repayments to credit card companies. On the other hand, it is causing the borrowers to lose their homes due to their default on loan liabilities.
You can prevent the effects of HELOC freeze by adopting certain strategies that vary as per your requirement. If you need HELOC to finish your home renovation, borrow as a lump sum before you get a HELOC freeze notice. You may also draw as much as you can and put the cash in high-yielding savings accounts till you get billed for repayment. You may also get your HELOC loan reinstated by petitioning the lender if your HELOC is already frozen. Just follow the lenders usual appealing process. Keep contacting the lender, and if it does not work you can also head to the court.