Avoiding the home equity freeze

A house sits atop of pile of money represents the costs of a home

TEXT OF INTERVIEW

Tess Vigeland: Over the past few years, banks went crazy promoting home equity lines of credit, also known as HELOCs.

If you're a homeowner, you probably got your share of notices promising to turn your house into an ATM or seen these tempting ads on TV:

[Ads]: ...Have a major expense coming up? A home equity loan could be the answer...

...Need a smart way to handle your debt?...

...No fees with a minimum $10,000 home equity loan and we'll finance up to 100 percent of your home's equity...

...A low-rate home equity loan could keep you out of the doghouse...

...This is Bob. He used the equity to pay off his bills, and he's saving a bundle every month on his house payment...

Well, as we've said before, banks are more than a little nervous these days and now they're sending out another kind of notice: one that says they're freezing your HELOC account.

What to do? To help us sort it out is Carolyn Bigda of Money Magazine.

Carolyn, welcome to the show.

Carolyn Bigda: Thank you for having me.

Vigeland: How are people finding out about this? Are they literally just getting a letter in the mail saying you don't have this credit line anymore?

Bigda: That's exactly how it's happening. You know, one day you have it, the next you go to your mailbox and you open the letter and it says "Something has changed in your credit score" or "Your home value is no longer as high as it once was" and so you can no longer access your line of credit.

Vigeland: If the banks are lowering or eliminating these credit lines based on falling home values, where are they getting the numbers for those falling values? Surely they're not sending out assessors everywhere?

Bigda: Oh, of course not, no. They're looking at a broader level, looking at county data, basing this on ZIP codes and if they see sort of a general trend in your neighborhood, in the area that you live, then that triggers the alert to them and they start sending out the letters.

Vigeland: What happens if you are literally in the middle of a project? You've got the contractor all ready to go and he's already been working on things and all of the sudden, you don't have money to pay for the rest of it.

Bigda: Yeah, that's a very difficult situation and it's the same with a lot of parents who were maybe planning on tapping their line of credit to send their kids to college this fall. In some cases, it may be advisable to, if you're afraid of having your line of credit frozen, to actually withdraw that money in one lump sum now and put it in a savings account.

Vigeland: Oh, so actually take it out of the line of credit and put it somewhere else so you actually have it?

Bigda: Yeah, exactly. If you think that you could be at risk of this, especially if you live in an area where home values have declined rapidly, you could be a good risk for this and so you might want to withdraw that money, being aware that now you're reducing the equity in your home and you're also going to have to pay interest on that money, but if you really need it, you could withdraw that in one lump sum and put that in a savings account.

Vigeland: Are we finding at all that this is hurting people's credit score?

Bigda: Exactly. That is a concern that consumers should be aware about, because if all of a sudden, your credit limit has dropped on your credit profile, then you look like you're tapping or maxing out really all the credit that's available to you, so if that's the case then you might talk with your lender to see if you can get part of that credit limit reinstalled or to think seriously now about paying down that credit line.

Vigeland: What else should you do if you've received one of these letters from your HELOC provider?

Bigda: Contact a local Realtor and pull prices for homes sold within three miles of your home within the last six months and show what the values are of homes in your neighborhood. If the lender is saying there's been a drop in your credit score and that's the reason for the freeze, pull your credit reports or get your credit scores and see what those numbers are. Again, the lenders are kind of taking a sweeping action here and they're not going, in most cases, home by home to see what your credit score is at or what your home's value really is.

Vigeland: Carolyn Bigda is a reporter for Money Magazine. Thanks so much for your help today.

Bigda: Oh, my pleasure.

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