Keep your home-equity line of credit from freezing

By Lew Sichelman

WASHINGTON (MarketWatch) -- Question: I have a shrunken home-equity line of credit with a big bank on the property in which I reside. What is the best strategy, if any, to minimize the possibility that the HELOC will be frozen or closed?

Currently, I have the line tapped to the max (minus breathing room for the minimum payment of interest only) with the funds in an interest-bearing account. While I'd prefer to pay it off, I would hate for the account to be shut down on me. As far as I can tell, my condo is right at the 80% loan-to-value mark now. If the market took another big hit, obviously the LTV would go higher and set off alarms. I am currently breaking even after tax on the interest in/interest out, but the terms are phenomenal versus terms on new lines of credit.

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What do banks do if your credit line is tapped to the max and they want to shut the line down? Do you continue to pay interest only or do they usually call the whole balance due and payable, and, if you do not have the money, charge you a rip-off rate? I am reluctant to ask the lender this as I think it is smarter to let sleeping dogs lie. Any insights would be appreciated.

Answer: I checked with several major home-equity lenders, none of whom wanted to be quoted directly, but here's what I found out off the record.

For starters, as long as you are current on your payments, lenders cannot demand that you pay down your balance, even if you are fully drawn. So you have nothing to worry about there.

All lenders have to abide by their contracts with borrowers, and home-equity lenders are no different. They can only take action that is allowed in the loan documents that, in the case of home-equity lines of credit, are typically tailored in accordance with Regulation Z, the federal Truth in Lending law. So read your papers carefully.

"We go by the contract," one lender told me. "Banks can only take action that is in the HELOC contract with the customer."

When a bank does take an action such as the one you fear, the contract typically allows the customer to continue to have an interest-only option through the remaining interest-only period of the loan. This is generally 10 years, but again, check your contract for specifics. At the end of the interest-only period, borrowers are required to repay what they owe, but that usually is allowed to take place over a designated period, which is typically 15 years.

HELOC contracts usually don't have rate increases associated with them. A customer typically keeps his interest rate through to termination of the loan.

Being delinquent is one situation that permits lenders to freeze a HELOC account, but you say you are current, so you have no danger there. A 50% decline in equity from the time the customer took out the loan could also allow the bank to freeze the account. Again, no danger, at least for now. As long as your loan-to-value ratio doesn't spike, you are good to go.

Finally, if your account is frozen for some reason and the situation improves -- you get back on track with your payments or the value recovers -- it is possible to have your draw privileges reinstated. But you'll have to provide proof. In the case of increased property values, that usually requires a new appraisal by an appraiser of the lender's choosing.

Hope that covers all your bases.

Cash-in refinancing

Question: I read your newspaper column regarding cash-in refinancing and found it very interesting. I was wondering where I might find additional information on exactly how this works. Thanks for your help.

Answer: Actually, it's pretty simple, so you need not look any further than right here.

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