A home equity line of credit (HELOC) lets you tap into your 澳洲幸运5官方开奖结果体彩网:home equity—the percentage of your home’s value that you already own—using the house as 澳洲幸运5官方开奖结果体彩网:collateral. In other wo𒐪rds, your home equity represents the difference🏅 between your outstanding mortgage loan balance and the value of your home.

HELOCs are attractive because they provide easy access to cash for renovations, 澳洲幸运5官方开奖结果体彩网:debt consolidation, medical bills, and other expenses. However, your lender can freeze or reduce your credit line if your property value drops since 澳洲幸运5官方开奖结果体彩网:HELOCs are tied to home equity. Discover how a home equity line of credit (HELOC) works and what to do if your home's property value declines.

What Is a Home Equity Line of Credit (HELOC)?

A HELOC is a revolving 澳洲幸运5官方开奖结果体彩网:credit line much like a credit card, except your home secures it. Because a house serves as collateral, HELOC interest rates—澳洲幸运5官方开奖结果体彩网:which are variable, not fixed—tend to be more favorable than those for credit cards and personal loans. 

Lending Requirements for HELOCs

Your mortgage lender approves you for a certain amount of credit based on your home equity, 澳洲幸运5官方开奖结果体彩网:credit score, 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) ratio, and other factors. As long as you stay under your credit limit, you can borrow whenever you need money, tapping the funds via online transfer, cash withdrawal from your local bank branch, or a check, ATM card, or credit card tied to the account. 🦹 

Example of a Home Equity Line of Credit (HELOC)

Let's say you have an outstanding mortgage loan balance of $200,000, and your home is valued at $350,000. In other words, you have $150,000 in home equity ($350,000 home value - $200,000 mortgage loan).

Typically, mortgage lenders will not allow you to borrow 100% of your home's equity. Let's say the lender agrees to lend you 80%, meaning you get approved for a HELOC of $120,000 (.080 * $150,000).

As a result, you will have two monthly payments—the original mortgage loan payment and the monthly interest payment on the HELOC balance. However, you will only have a monthly payment on the HELOC if you borrow from it. This example excludes 澳洲幸运5官方开奖结果体彩网:property taxes, 澳洲幸运5官方开奖结果体彩网:homeowners insurance, and fees.

How Do You Repay a HELOC?

HELOCs generally have two stages: a draw period and a 澳洲幸运5官方开奖结果体彩网:repayment period. 

The draw period usually lasts 10 years, during which time you can borrow up to your 澳洲幸运5官方开奖结果体彩网:credit limit, repay it, and borrow again as often as you wish. During this stage, you pay interest on your borrowed amount or make a minimum monthly payment (per your loan agreement). You also might be able to make payments toward the loan 澳洲幸运5官方开奖结果体彩网:principal, lender permitting. 

When the draw period ends, the HELOC closes—meaning that you can’t draw any more money—and shifts to the repayment period. You’ll make monthly payments to pay down the principal and interest, generally over 20 years. The size of your payment will depend on your outstanding balance at the end of the draw period and the prevailing interest rate. Some HELOCs have a 澳洲幸运5官方开奖结果体彩网:balloon payment, meaning that the entire amount of the loan plus interest comes immediately due at the end of the draw period.

HELOCs and Declining Home Values

As mentioned above, your HELOC credit limit is tied to your home’s value, among other numbers. While your lender considers the value of your home when you apply for a HELOC, it evaluates your credit line and ability to make payments over the entire loan term. If something has changed dramatically since you secured the loan, your lender can reduce or freeze your HELOC.  

Why a Lender Might Freeze or Reduce Your HELOC

Should that happen, you won’t be able to draw your credit line’s total amount (or, in the case of a freeze, any part). However, you’ll still need to fulfill the loan agreement and make the monthly interest payments. Some of the most common reasons why a lender might reduce or freeze your credit line are that your:

• 澳洲幸运5官方开奖结果体彩网:Credit rating has dropped
• Employment or income status has changed
• Overall debt load has increased
• Marital status has changed
• Home’s value has declined significantly

Appealing a Lender's Decision to Freeze or Reduce Your HELOC

Your lender must send you written notice within three business days after it reduces or freezes your HELOC. If the lender’s reasoning doesn’t make sense to you, ask for a detailಞed explanation and if there’s anything you can do to restore your credit line.

You can appeal the decision if you think the lender has made a mistake—for example, your home is worth more than your lender realizes because you made substantial improvements recently. Of course, your lender will expect an updated home 澳洲幸运5官方开奖结果体彩网:appraisal if you want to appeal based on your property’s value. However, keep in mind that the appraisal fees will be your responsibility, and, more importantly, an updated appraisal won’t guarantee that your lender will approve your appeal.

If your lender doesn’t restore 澳洲幸运5官方开奖结果体彩网:your HELOC, you can check with other lenders to see their offerings. You might be able to🤪 open a new HELOC and use some of the funds to pay off your original line of credit.

The Bottom Line

Property values tend to rise over time. Still, rising mortgage rates, supply increases, demand decreases, recessions, and other events can lead to lower prices. If your home’s value drops slightly, your lender probably won’t reduce or freeze your HELOC, as slight market fluctuations are normal. However, if your home’s value declines substantially, your lender might take action to limit their credit risk.