Q: The amount of my home equity loan has decreased by $40,000 (of a formerly $150,000 loan). I don’t feel the remaining amount represents a true percentage value of my home. Is it possible that my home loan could be cancelled or called in? I have been borrowing from it, using it as an emergency fund. Now that I have a real emergency, I need to make sure that it stays in place.
Anonymous, Columbia, MD
A: I’m surprised the bank hasn’t yanked the loan entirely, as many financial institutions have done since the downturn in the housing market started and the recession kicked in.
In its most recent survey of banks, the Federal Reserve found that, on existing accounts for households, about 40% of domestic banks reported having reduced the sizes of existing home equity lines of credit.
It’s quite possible, and likely, the market value of your home has decreased, as it has for thousands of homes around the country.
And, if you read your credit contract, you will find that the bank has the right to freeze or reduce your line of credit if your home’s market value drops dramatically or the lender doesn’t think you can pay the loan because of a change in your financial situation.
But, you have some rights. The Truth in Lending Act, as implemented by Regulation Z, sets forth the circumstances under which a home equity line of credit can be terminated, suspended or reduced. Generally, a lender can’t accelerate the repayment of your outstanding balance. So, it’s unlikely you will have to pay back the loan in full, but the bank may be within its rights to reduce your line of credit.
The Federal Reserve recommends the following if your credit line has been reduced:
- Talk with your lender. Find out what caused the lender to freeze or reduce your credit line and what, if anything, you can do to restore it.
- Provide additional information to the lender that may help restore your line of credit, such as documentation showing that your house has retained its value or that there has not been a “material change” in your financial circumstances.
- Get a new appraisal. However, if your lender agrees to an updated appraisal, be sure you discuss appraisal firms in advance, so that you know they will accept the new appraisal as valid.
Also consider this: A home equity line of credit should not be your emergency fund. Your rainy-day money should be in the form of cash savings. Honestly, if you are borrowing for an emergency, you are in deep trouble. If at all possible, stop the borrowing now. Cut your expenses, get another job, but stop digging that debt hole.