Lenders shutting the door to home equity lines of credit

Your home equity line of credit may no longer be the safety net you've grown accustomed to, whether you use it for large-scale home renovations or as an emergency fund when unexpected expenses pop up.

Lenders are putting on the brakes - cutting off existing home equity lines of credit and limiting new lines. The Wall Street Journal reports major lenders, including Bank of America, Citibank, Countrywide Financial, Washington Mutual Bank, and USAA, have informed hundreds of thousands of customers that their lines of credit have been frozen this year.

Just a few years ago, a homeowner could use a home equity line of credit to borrow as much as 100 percent of the value of their home. Now 65 percent of the value is standard, according to HSH Associates Financial Publishers in New Jersey, The Wall Street Journal reported.

Reductions to home equity lines of credit could hurt the economy, according to experts interviewed by the Ocean County Register, as people spend less when their access to credit is limited and the economy depends on that consumer spending. Also, consumers who rely on credits lines to make ends meet may default on their primary home loans.

In home equity line of credit agreements, it is standard practice for lenders to include language that they may limit or stop a credit line if home values decline or if a borrower fails to make timely payments. Kiplinger.com reports that lenders who cut off a credit line will invite the borrower to discuss their situation and appeal the decision.

"You may have a case for appeal given that the 'automated valuation method' that lenders use to determine property values tends to paint with wide brush strokes," Kiplinger.com said.

For an appeal, the borrower would have to pay for a home appraisal, approximately $200 to $400.

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