Whether for home repairs, debt consolidation or some other use, if you took out a home equity line of credit (HELOC) in the past, you may be worried if your bank notifies you of a HELOC freeze or reduction. As their names imply, a freeze means your ability to draw from your HELOC has been stopped altogether, while a reduction means the maximum amount you can borrow has decreased.
While it may be an inconvenience, if you’ve received a HELOC freeze letter or HELOC reduction notice, you have options. Below, we’ll walk you through some common reasons for these interruptions to your line of credit, as well as the steps you can take toward recourse.
Key Points
• A HELOC freeze stops borrowing, while a reduction lowers the maximum available amount.
• A credit score drop, home value decline, or missed payments can trigger a HELOC freeze or reduction.
• A HELOC reduction can negatively impact credit scores by changing the credit utilization ratio.
• Borrowers should contact their lender to understand and appeal the decision if a HELOC is frozen or reduced.
• Alternatives to a frozen or reduced HELOC include refinancing or obtaining a home equity loan.
Defining HELOC Freezes and Reductions
Since we’re talking about two distinct possibilities, here, let’s first take a moment to define them.
• A HELOC freeze means your lender has “frozen” your home equity line of credit; you won’t be able to borrow any more money from your open line of credit.
• A HELOC reduction means that the maximum amount of money you can borrow has been lowered.
Common Reasons for HELOC Freezes and Reductions
A lender might freeze or reduce your HELOC under the following circumstances:
• A change in your credit score or other economic factors. If your credit score drops precipitously, your lender may freeze or reduce your HELOC as a result.
• A drop in your home’s value. Since your home is the asset that the lender is using as collateral, if its value goes down, the bank may freeze or reduce your HELOC to protect themselves.
• Lack of payment. Another reason your HELOC may be frozen or reduced is because you aren’t making payments. Since they aren’t seeing what they’ve already lent paid back, the bank may freeze the option to borrow additional funds.
How HELOC Freezes and Reductions Affect Borrowers
For borrowers who took out a HELOC to meet financial needs, HELOC freezes and reductions can obviously be a major inconvenience: They dry up a source of funds that was otherwise available.
Additionally, HELOC reductions can have an impact on the borrower’s credit score if they lower the overall utilization ratio (the amount of credit available to the borrower as compared to the amount being used). This, in turn, can make future borrowing more difficult.
Steps to Take If Your HELOC Is Frozen or Reduced
If your HELOC has been frozen or reduced, good news: You’ve got options! Remember that it’s important to keep making any payments that are due on your HELOC while you consider which of these steps to take.
• Communicate with your lender. Calling up your lender can help you understand why the freeze or reduction was placed on your account — and can also help you understand what steps you need to take to have it reversed.
• Appeal the decision. For example, if you weren’t making payments and you have since made a payment toward your HELOC, you can request that the freeze or reduction be lifted, as the original cause has now been rectified.
• Consider alternatives. Whether it’s a HELOC from another lender, a home equity line of credit or another type of loan, you may still be able to qualify for funding elsewhere. (We’ll talk more about these alternatives in just a moment.)
Preventing HELOC Freezes and Reductions
If you’ve got a HELOC and are hoping to avoid a freeze or reduction, here are some of the best ways to do so.
• Maintain your property’s value. While there may be little you can do about a major economic downturn, keeping your home in good repair can help avoid a HELOC freeze — not to mention other logistical headaches.
• Keep up your credit score. Making on-time monthly payments on all your debts is one of the best ways to maintain, and even improve, your credit score.
• Make consistent payments. Your HELOC lender is unlikely to instate a freeze or reduction if they believe you can repay the loan — and one of the best ways to prove you can repay is to simply do so.
Alternatives to Consider
If your lender won’t reverse your HELOC freeze or reduction, you might consider an alternative option. For instance, you may be able to refinance your HELOC — either with a new HELOC from a different lender or with a home equity loan.
As you compare a HELOC vs. a home equity loan, you’ll see that a home equity loan is more likely to give you the benefit of fixed interest (and fixed monthly payments). A home equity loan is basically an installment loan, like a personal loan, but secured by your home equity as collateral.
Whether you explore home equity loans or choose to take out a new HELOC, be sure you understand the tax implications ahead of time (talk to your tax advisor), as well as how much you may stand to pay over time. Both of these loans come with closing costs, and extending the term of your second mortgage can mean paying more interest — as well as making it more difficult to build wealth in your home.
The Takeaway
A HELOC freeze or reduction can be an inconvenience, but depending on its cause, you may be able to appeal the decision. If not, there are other options to explore, including refinancing your HELOC or taking out a home equity loan. Exploring both options with different lenders can help you find the arrangement that makes the most sense for you.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
How long can a HELOC freeze last?
While there’s no specific maximum time frame that a HELOC freeze can last, lenders are obligated to unfreeze the account as soon as the cause for the freeze is taken care of. If you believe the original cause of the freeze has been ameliorated and your bank has not lifted the freeze, contact them directly.
Can I appeal a HELOC reduction or freeze?
Yes, you can submit an appeal to your lender if they’ve reduced or frozen your HELOC. Of course, depending on the cause of the freeze or reduction, your lender may or may not approve your appeal if the original cause hasn’t been sorted out.
Will a HELOC freeze affect my credit score?
While the freeze itself shouldn’t affect your credit score, if the freeze is the result of missed payments or a change in your personal financial factors, you may see your score drop. Additionally, if you’re subject to a HELOC reduction rather than a HELOC freeze, the lowered credit maximum may change your overall credit utilization ratio, which could have an impact on your score.
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