When Are Home Equity Loans Frozen?

Home equity loans are frozen when banks and other financial institutions in the business of lending money stop lending out more money to protect from losses they might face, due to either subprime mortgage or any other high-risk loans. When this happens it is very hard for borrowers to get any money on their existing home equity loans. The biggest trigger for a freeze in home equity loans is a drop in the value of a borrower’s home, regardless of his or her payment history.

Most home equity loans are essentially lines of credit, allowing you to borrow money against the value of your home, and then pay it back, and then borrow more again, until you hit the limit the bank has imposed on your loan. It’s a lot like having a credit card. However, when a bank places a freeze on home equity loans, it means that you can’t borrow any more money – even if you’re making all of your payments on time and have a flawless credit history. The bottom line is that in many cases a bank’s lending freeze isn’t about you or other individual borrowers, it’s about the larger macroeconomic forces. Currently, the value of people’s homes are plummeting all over the country due to the dramatic bust in the real estate market. So as the value of a home drops, the credit line limit that was originally extended to the homeowner is now a potential problem for the bank: the borrower’s collateral is no longer worth what it once was, and that means the bank finds itself “out on a limb.”

If your home equity loan has been frozen, don’t panic. You can appeal to the bank on an individual basis. If you’ve got an excellent credit history and a steady, healthy income, you might get some relief. You can also consider refinancing your home equity loan at a lower rate. First and foremost, however, it’s important that you go over all your options with a financial advisor or bank representative. When it comes to your money and financial future, you need to make sure you know exactly what you’re doing.