Home Equity Loans and Credit Reductions
A home equity line of credit is a form of revolving credit in which an existing owned home or property serves as the collateral. Because a home often is a consumer’s most valuable asset and a home equity loan or line is a mortgage recorded against the home, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.
Even though home equity loans were generally used for large expenses, they became a very common consumer loan. Many homeowners obtained home equity loans as reserve line of credit just in case a situation arose that required quick access to a large sum of money. Since the home equity line of credit is secured by the property they are a mortgage and the interest rate is measurably lower than most other consumer forms of borrowing. In addition, the interest paid is generally tax deductible. Low mortgage rates, convenience and aggressive marketing by mortgage lenders fueled the growth of this home loan product.
Part of the long term appeal of the home equity loan for some borrowers was once that borrower was approved for a home equity line of credit, they would be able to borrow up to their credit limit whenever they wanted even well into the future.
Now that property values have fallen and credit is both tight and deteriorating in quality, many mortgage lenders are cutting off access to home equity lines for their existing customers.
For many homeowners the loss of credit availability couldn’t come at worse time. With less available credit and family incomes moving lower, theses home equity lines of credit are being stripped away just when they may be needed the most. The mortgage lender generally reduces the line of credit or blocks access to additional credit to simply reduce their exposure to the risk presented by falling property values.
For those homeowners that find their mortgage lender has in fact restricted the use of their home equity loan, there are steps to try and ameliorate the inconvenience this may cause. Many mortgage lenders are approaching the issue of falling property values and reduced equity with responsibility and are prudent with their decisions to avoid slashing access to hone equity indiscriminately.
The mortgage lender that originates a home equity line of credit and subsequently changes the account must provide a written notice if they have frozen or reduced a borrowers existing home equity loan. This notice will usually include information about any other changes to the terms of the loan as well as the basis for those changes. A freeze or reduction notice on an existing home equity line of credit should include specific reasons for the action taken by the mortgage lender.
The primary reason for the equity line reductions is the fall in value of the home. The mortgage lender may provide the basis for determine the drop in property value with a contact should the borrower question the assessment.
Other than a drop in the homes value, a mortgage lender may reduce or restrict the use of an existing home equity loan due to a change in the financial circumstances of the borrower such as significant reduction in the borrower’s credit score. This may be a harder to obstacle to overcome but is worth investigating with the mortgage lender.
Understanding the mortgage lender’s reasoning may help those borrowers that want to take steps to have their credit line reinstated to its original amount. Most mortgage lenders have fair appeals procedures to handle any upcoming changes to the existing terms of a home equity line. The mortgage lender may reinstate the credit privileges when the conditions permitting the freeze or reduction no longer exist or are reasonably refuted.
The borrower may need to put in writing the request to have a home equity line of credit reinstated. Once the mortgage lender receives the written request, they must promptly investigate and determine whether the HELOC can be reinstated and the grounds on why it would not.