Dear Dr. Don,
I refinanced my home in early 2007 with a $35,000 cash out and a home equity line of credit for an additional $27,500. At the time, the house was appraised at $175,000 by the bank.
I used $30,000 of the cash-out to remodel my home and didn't touch the HELOC. A few weeks ago, I got a letter stating that the line of credit had been decreased from $27,500 to $5,000.
How can the bank override a good customer who signed agreements in an attorney's office, paid closing costs and never defaulted on payments? Now, I have sunk the $30,000 into remodeling and only have $5,000 available on the HELOC. I say that is a bad deal.
Evidently, I should have used the HELOC and kept my $30,000 as a cash reserve for hard times.
I think that my bank is being awfully shortsighted. Doesn't its future depend on having good customers to keep their doors open? What do you think?
-- Esther Egregious
Dear Esther,
I understand your frustration, but I can see the lender's side to this, too. A home equity line of credit is collateralized (secured) by the value of the property. Declining home values can shift the risk position of the lender.
The lender needs to be proactive in managing this risk so it can continue to have a collateralized loan. You didn't mention the payoff balance. But when closing in 2007, you made arrangements to borrow up to $62,500 over and above the payoff balance of the original mortgage on a home that was worth $175,000.
Unfortunately, this problem with HELOCs has become pervasive in U.S. mortgage markets. Mortgage lenders are looking to manage their risk and they're doing it by reducing or freezing home equity lines of credit.
The letter you received from your lender may spell out some options in petitioning the lender to reinstate or increase your credit line. You're going to have to decide if it's worth it to fight this reduction in your credit line.
If you're convinced that there's enough equity in your home to justify a larger HELOC balance, you can vote with your feet and apply for a HELOC with another lender. The closing costs on these loans are typically low enough that this strategy is an affordable option.
The Bankrate feature "Keeping liquid in a home equity freeze" has more about the issue.
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