If you have a Home Equity Line in place for emergencies, or you are drawing against a home equity line gradually (perhaps because you are renovating your home in stages), you need to know that many homeowners across the US have recently had their lines frozen or cancelled. Often, this is occurring with little or no advance notification.
The Wall Street Journal recently ran a two-part series profiling several homeowners who had their home equity lines frozen unexpectedly. In one instance, a homeowner had his line cancelled in the middle of a huge renovation project and he had to use his IRA to finish the project because he had no other assets available to pay the contractors.
If you are tapping an existing home equity line in stages, you should be aware that something like this could happen to you. Usually, it is the larger banks that are freezing lines -- the article specifically mentions Bank of America, Citibank, Countrywide and Washington Mutual --and most of the freezes are related to a missed payment. However, even borrowers with stellar payment histories can be impacted if the value of their home has dropped dramatically since the line of credit was established.
If you are afraid that this might happen to you, you might want to consider withdrawing the full amount that you will need for a renovation or purchase all at once, in advance of starting a project. That way, you will know that the money is available. The downside to this strategy is that you will owe interest on the full amount withdrawn right away. If you had made withdrawals over time -- as your renovation progressed -- you would have paid less in interest charges. Alternatively, you might also wish to consider taking out a fixed rate home equity loan instead of a line of credit.
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