HELOC: Keep It Active To Stop Termination

Added November 14, 2008 by Ilyce R. Glink

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Summary: In a poor economy, banks and mortgage companies shut down home equity lines of credit or HELOCs. What if you need to use your HELOC to cover every day expenses when your income declines? Ilyce suggests keeping your HELOC active by paying fees and drawing on it before the bank decides the HELOC is inactive.

Q: Do you think banks will cut off all equity lines of credit? We have an established equity line set with a major bank. The bank also holds our mortgage.

With the economic uncertainty and most of my income coming in the form of a commission, we may have to dip into our existing equity line of credit for living expenses.

We hope this won't be the case, but we're worried that our bank will cut off our line of credit.

A: Banks and mortgage companies have already begun to shut off home equity lines of credit. The bank's ability to shut off the line of credit should be set forth in the loan documentation for the line of credit.

When lenders shut off home equity lines of credit, they either close the line of credit completely, or they lower the amount of credit available, based on the lender's understanding of how much home values have declined in a particular neighborhood.

You should review your home equity line of credit documents to determine if the paperwork gives the lender any right to cancel the line of credit. If you are depending on this cash for a possible economic lifeline, I'd think seriously about drawing down at least some of it now, to keep the line open and active. Also, be sure to renew the line of credit on time. Often, you'll pay a fee of $30 to $50 per year to keep your home equity line of credit (HELOC) open. If you're late with that payment, you might well find your HELOC shuttered.

But in general, I don't think banks and mortgage lenders will close off all home equity lines of credit.

There may be many different circumstances that impact the bank's decision to cut off or limit a line of credit. Some of these issues may involve what real estate values have done in your area, the problems the bank is having in the local real estate market, and any negative credit information the bank receives about your finances.

If your credit is good, your property value has not decreased, the balance on your main mortgage loan and the balance on the home equity line of credit are lower relative to home value than the norm, and you live in an area that has not been hit hard by other foreclosures, even if your current lender cuts your equity line of credit I believe there will be others in the neighborhood that would be delighted to have your business.

Published: Nov 14, 2008

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